Clurname Pty Limited v McGraw-Hill Financial, Inc
[2017] FCA 1319
•10 November 2017
FEDERAL COURT OF AUSTRALIA
Clurname Pty Limited v McGraw-Hill Financial, Inc [2017] FCA 1319
File number: NSD 957 of 2015 Judge: WIGNEY J Date of judgment: 10 November 2017 Catchwords: PRACTICE AND PROCEDURE – application for leave to amend originating application and pleading – where representative Applicants allege loss and damage arising from Respondents’ rating of synthetic collateralised debt obligations (SCDOs) – where amendments seek to introduce causes of action in tort of deceit and equitable unconscionability – where amendments brought more than two years after proceedings commenced and seven months before joint trial with related proceedings – where Respondents plead that the Applicants’ causes of action are statute barred – where deceit claim would form basis of concealed fraud claim to defeat limitation defence – whether leave to amend should be allowed – whether deceit claim is reasonably arguable or has reasonable prospects of success – whether deceit claim would be statue barred and is therefore futile – whether pleading is deficient – discretionary considerations – importance of the amendments – whether delay in bringing amendments adequately explained – prejudice to the Respondents – prejudice to third parties in related proceedings
PRACTICE AND PROCEDURE – whether Court has jurisdiction to grant leave to amend – whether deceit claim is governed by New York law – whether deceit claim is statute barred – whether Australia is the appropriate forum for the determination of the deceit claim
Held: leave to amend granted.
Legislation: Australian Securities and Investments Commission Act 2001 (Cth) ss 12CB, 12GF(2)
Corporations Act 2001 (Cth) ss 1041I(2), 1317
Evidence Act 1995 (Cth) s 63
Federal Court of Australia Act 1976 (Cth) Part IVA, ss 37M, 37M(3), 59(2B)
Trade Practices Act 1974 (Cth) (repealed)
Federal Court Rules 1979 (Cth), O 13, rr 2, 3A (repealed)
Federal Court Rules 2011 (Cth) rr 1.32, 8.21, 8.21(1)(g)(i), 8.21(2), 16.51, 16.53, 16.54
Limitation Act 1969 (NSW) ss 14, 55, 55(1)(a), 55(1)(b)
Cases cited: ABN AMRO Bank NV v Bathurst Regional Council (2014) 224 FCR 1
Abu Dhabi Commercial Bank v Morgan Stanley & Co Incorporated 88 FSupp 2D 431 (SDNY 2012)
Althaus v Australia Meat Holdings Pty Ltd [2007] 1 Qd R 493
Aon Risk Services Australia Ltd v Australian National University (2009) 239 CLR 175
Australian Securities and Investments Commission v Australian Property Custodian Holdings Ltd (No 2) (2013) 213 FCR 289
Baldry v Jackson [1976] 2 NSWLR 415
Betfair Pty Ltd v Racing New South Wales (2010) 189 FCR 356
Brickfield Properties Ltd v Newton [1971] 3 All ER 328; [1971] 1 WLR 862
Caason Investments Pty Ltd v Cao (2015) 236 FCR 322
CE Heath Underwriting & Insurance (Australia) Pty Ltd v Daraway Constructions Pty Ltd (unreported, Supreme Court of Victoria, Batt J, 3 August 1995)
Clark v Clark (1882) 8 VLR (E) 303
Clasul Pty Ltd v Commonwealth of Australia [2014] FCA 1133
Clough v Frog (1974) 4 ALR 615; (1974) 48 ALJR 481
Commercial Union Assurance Company of Australia Ltd v Ferrcom Pty Ltd (1991) 22 NSWLR 389
Commonwealth Bank of Australia v Kojic (2016) 341 ALR 572
Dare v Pulham (1982) 148 CLR 658
Dornan v JW Ellis & Co Ltd [1962] 1 QB 583
Dow Jones & Co Inc v Gutnick (2002) 210 CLR 575
Draney v Barry [2002] 1 Qd R 145
Dye v Commonwealth Securities Limited (No 2) [2010] FCAFC 118
Energex Ltd v Alstom Australia Ltd (2005) 225 ALR 504
Ensham Resources Pty Limited v AIOI Insurance Company Limited [2012] FCA 537
Feiglin v Ainsworth [2014] VSC 376
Forrest v Australian Securities and Investments Commission (2012) 247 CLR 486
Gloucester Shire Council v Fitch Ratings, Inc (No 2) [2017] FCA 248
Harman v Secretary of State for Home Department [1983] 1 AC 280
Hearne v Street (2008) 235 CLR 125
Macquarie Bank Ltd v Sixty-Fourth Throne Pty Ltd [1998] 3 VR 133
McGrath v HNSW Pty Ltd (2014) 219 FCR 489
Medich v Bentley-Smythe Pty Ltd [2010] FCA 494
Oztech Pty Ltd v Public Trustee of Queensland (No 2) [2015] FCA 1485
Paragon Finance plc v D B Thakerar & Co [1999] 1 All ER 400
Peco Arts Inc v Hazlitt Gallery Ltd [1983] 1 WLR 1315
Regie Nationale des Usines Renault SA v Zhang (2002) 210 CLR 491
Research in Motion Ltd v Samsung Electronics Australia Pty Ltd (2009) 176 FCR 66
Richards v Cornford (No 3) [2010] NSWCA 134
Skrijel v Mengler [1998] VSC 71
State of New South Wales v McCloy Hutcherson Pty Limited (1993) 43 FCR 489
State of New South Wales v Radford (2010) 79 NSWLR 327
Tamaya Resources Ltd (in liq) v Deloitte Touche Tohmatsu (A Firm), in the matter of Tamaya Resources Ltd (in liq) [2015] FCA 1098
Thomas v State of Queensland [2001] QCA 336
Voth v Manildra Flour Mills Pty Ltd (1990) 171 CLR 538
Voxson Pty Ltd v Telstra Corporation Ltd (No 7) (2017) 343 ALR 681
Wardley Australia Ltd v The State of Western Australia (1992) 175 CLR 514
Weldon v Neal (1887) 56 LJQB 621; (1887) 19 QBD 394
Welsh Development Agency v Redpath Dorman Long Ltd [1994] 4 All ER 10; [1994] 1 WLR 1409
Weston v Publishing and Broadcasting Ltd (2011) 83 ACSR 206
Wilson v Rigg (2002) 36 MVR 451
Date of hearing: 10-13 October 2017 Registry: New South Wales Division: General Division National Practice Area: Commercial and Corporations Sub-area: Corporations and Corporate Insolvency Category: Catchwords Number of paragraphs: 217 Counsel for the Applicants: Mr C Withers with Ms A Lyons Solicitor for the Applicants: Squire Patton Boggs Counsel for the Respondents: Mr J Hewitt with Ms R Gall Solicitor for the Respondents: Clifford Chance ORDERS
NSD 957 of 2015 BETWEEN: CLURNAME PTY LIMITED (ABN 66 02 898 231)
First Applicant
GOULBURN MULWAREE COUNCIL
Second Applicant
AND: MCGRAW-HILL FINANCIAL, INC (FORMERLY MCGRAW-HILL COMPANIES, INC (A COMPANY INCORPORATED IN NEW YORK)
First Respondent
STANDARD & POOR'S INTERNATIONAL, LLC (A COMPANY INCORPORATED IN DELAWARE)
Second Respondent
JUDGE:
WIGNEY J
DATE OF ORDER:
13 OCTOBER 2017
THE COURT ORDERS THAT:
1.Leave be granted to the applicants pursuant to r 8.21 of the Federal Court Rules 2011 (Cth) to amend the Amended Originating Application by filing and serving the Second Further Amended Originating Application in the form annexed to the interlocutory application dated 15 August 2017 on or before 20 October 2017.
2.Leave be granted to the applicants pursuant to r 16.53 of the Federal Court Rules 2011 (Cth) to amend the Further Amended Statement of Claim by filing and serving the Second Further Amended Statement of Claim in the form annexed to the interlocutory application dated 15 August 2017 on or before 20 October 2017.
3.The amendments contained in the Second Further Amended Originating Application and Second Further Amended Statement of Claim be taken to have effect from the date of the commencement of the proceedings.
4.The time period for the respondent to seek leave to appeal from these orders not commence to run until the publication of the reasons for making the orders.
5.The parties are to confer with a view to agreeing on consent orders for the further conduct of the matter, including the variation of existing orders for the filing of evidence.
6.In the event that the parties are unable to agree on orders for the further conduct of the matter, the matter will be listed for a further case management hearing at 9.30 am on 23 October 2017.
7.Pursuant to s 37AI of the Federal Court of Australia Act 1976 (Cth), and in order to prevent prejudice to the proper administration of justice, third party access be restricted for a period of 14 days to Exhibits A16 and A18 tendered at this hearing, being the unredacted deposition transcripts of Richard Gugliada in the United States of America ‘UDBC’ and ‘DOJ’ proceedings.
Note: Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011.
REASONS FOR JUDGMENT
WIGNEY J:
This is the latest in a spate of seemingly interminable interlocutory disputes that have plagued the series of related representative proceedings that have been commenced against the corporate entities associated with the global ratings business Standard & Poor’s. A number of those proceedings, including this one, have been listed for a joint hearing to commence in March 2018 and run for eight weeks. The current interlocutory application is an application by the representative applicants, Clurname Pty Ltd and Goulburn Mulwaree Council (collectively Clurname), to further amend their originating application and statement of claim. Like most of the interlocutory disputes in this litigation, this application was vigorously contested, involved voluminous evidence, raised multiple issues, was the subject of extensive submissions of law and fact, and would test the patience of Job.
The proposed amendments were undoubtedly significant and, most importantly, pleaded new causes of action in the tort of deceit and equitable unconscionability. The existing case against Standard & Poor’s is, in simple terms, that it made certain misleading and deceptive representations arising from its ratings of financial products that were acquired by Clurname. Clurname now wishes to allege that Standard & Poor’s knew that those representations were false. Its purpose in raising the new deceit claim is, somewhat unashamedly, to “lay the groundwork for a response to Standard & Poor’s limitation defence to the existing claims”. Clurname submitted that the proposed amendments were important, raised reasonably arguable new causes of action, were brought forward at the earliest opportunity, and would not result in any prejudice to Standard & Poor’s. Standard & Poor’s contended, “without being exhaustive”, that leave to amend should be refused because there are serious deficiencies in the pleading of the new deceit claim, the deceit claim would be governed by New York law and is statute barred, Australia is not the appropriate forum for the resolution of the deceit claim, and discretionary considerations, including delay, weighed heavily against the grant of leave. It submitted it would suffer serious prejudice and would not be able to fairly respond to the new claims in time for the trial next year.
Following a hearing that commenced on 10 October 2017 and spanned four days, orders were made granting Clurname leave to amend. It was indicated that the reasons would follow as soon as possible. These are the reasons for allowing the amendment.
BACKGROUND
It is probably unnecessary, and in any event not feasible given the imperative of swiftly resolving this interlocutory dispute, to provide an exhaustive background to the proceeding.
The existing pleading
The proceeding commenced by Clurname is a representative proceeding under Part IVA of the Federal Court of Australia Act 1976 (Cth) (FCA Act). Clurname alleges that it and the group members on whose behalf the proceeding has been commenced sustained losses arising from their investments in financial products which were issued by Corsair (Jersey) No. 2 Ltd and Helix Capital (Jersey) Ltd. The financial products in question were particular forms of synthetic collateralised debt obligations or SCDOs. As the name suggests, SCDOs are a form of collateralised debt obligation, or CDO. The SCDOs were given various names. For the sake of simplicity, they will be referred to as the Pure and Oasis SCDOs, or collectively as the SCDOs.
The “arranger” of the issue of the Pure SCDOs was JP Morgan Australia Limited. The arranger of the Oasis SCDOs was Banc of America Securities Limited. The Commonwealth Bank of Australia was a distributor of the SCDOs in Australia. It appears to have purchased the Pure and Oasis SCDOs as principal and to have then on-sold them to investors, including Clurname.
Standard & Poor’s involvement in the issue of the Pure and Oasis SCDOs came about because it assigned credit ratings to the SCDOs. Some of the Pure and Oasis SCDOs were assigned a AAA rating, which Clurname alleges represented that those SCDOs “should be able to withstand an extreme level of stress” and that their capacity to pay coupons and principal at maturity was “extremely strong”. Some were issued a AA rating, which was said to represent that those SCDOs “should be able to withstand a severe level of stress” and that their capacity to pay coupons and principal at maturity was “very strong”. Finally, some of the Oasis SCDOs only received an A rating. That was said to represent that those SCDOs “should be able to withstand a substantial level of stress” and that their capacity to pay coupons and principal at maturity was “strong”.
Clurname’s existing pleading makes two key allegations against Standard & Poor’s in relation to their conduct in issuing the ratings in respect of the Pure and Oasis SCDOs.
First, Clurname alleges that in assigning the AAA, AA and A ratings to the Pure and Oasis SCDOs, Standard & Poor’s intended to, and did, communicate and represent that their “conclusions” concerning the ratings were based on reasonable grounds, and that in reaching those conclusions it had exercised reasonable care and skill. Those representations are defined in the existing pleading as the S&P AAA Representations, the S&P AA Representations and the S&P A Representations, depending on the particular SCDO to which the ratings were assigned. For the sake of brevity, those representations will be referred to collectively as the S&P Ratings Representations.
Clurname contends that the S&P Ratings Representations were “false and misleading and/or misleading and deceptive and/or misleading in a material particular”. That was because, so it is alleged, Standard & Poor’s did not have reasonable grounds for reaching the relevant conclusions, the assignment of the AAA, AA and A ratings was not the product of the exercise of reasonable care and skill, and because no reasonably competent ratings agency would have assigned AAA, AA or A ratings to the relevant Pure and Oasis SCDOs with the data and information that was obtained by Standard & Poor’s as a result of its modelling processes for the SCDOs.
Second, Clurname alleges that Standard & Poor’s represented and held out that its credit ratings of the SCDOs was “objective, independent, uninfluenced by any conflicts of interest that might compromise [Standard & Poor’s] analytical judgment and reflected [Standard & Poor’s] true current opinion regarding the credit risks that SCDOs posed to investors”. That representation is defined in the existing pleading as the S&P Independence Representation.
Clurname contends, in paragraph [104] of the existing pleading, that the S&P Independence Representation was “false and misleading and/or misleading and deceptive and/or misleading in a material particular” because:
104.1Arrangers of structured credit derivatives, including SCDOs, were S&P’s primary customers and retained S&P to provide its ratings opinion as to new products they had created;
104.1S&P generated substantial revenue and profits from rating structured credit derivatives;
104.2S&P competed with other ratings agencies in the market for rating services;
104.3S&P objective to increase its share of market for rating services led S&P to underestimate and disregard the true extent of the credit risks posed by SCDOs;
104.4The underestimation of credit risks benefited the arrangers and issuers of the SCDOs by making it possible for them to issue SCDOs with less credit protection, thereby making deals more profitable to them;
104.5That enabled issuers and arrangers to bring more ratings business to S&P;
104.6S&P’s objective to increase its market share and increase its profits and revenue by underestimating credit risks in its ratings process meant that S&P did not apply an independent and objective process to its rating of the SCDOs.
The S&P Ratings Representations and S&P Independence Representation are collectively referred to in the existing pleading as the S&P Representations. Clurname alleges that, in issuing the ratings and making the S&P Representations in all the pleaded circumstances, Standard & Poor’s contravened various provisions of the Corporations Act 2001 (Cth) and the Australian Securities and Investments Commission Act 2001 (Cth) (ASIC Act). It also alleges that in issuing the ratings and making the S&P Representations, Standard & Poor’s breached its duty of care to potential purchasers to exercise reasonable care in forming and publishing its opinion as to the creditworthiness of the SCDOs. Finally, Clurname alleges that in failing to disclose the matters which made the S&P Independence Representation false and misleading, Standard & Poor’s engaged in unconscionable conduct.
Clurname’s case as pleaded is that, in proceeding with the acquisition of the SCDOs, it relied substantially on the ratings assigned to the SCDOs by Standard & Poor’s and on the S&P Representations. It did so on the basis of a belief that the ratings were a reliable, independent indicator of the creditworthiness of the SCDOs.
It is important to emphasise at this juncture that none of the existing causes of action require Clurname to allege or prove that Standard & Poor’s knew that the S&P Representations were false. Nor is that corporate state of mind on the part of Standard & Poor’s currently pleaded.
It is unnecessary to attempt to summarise Standard & Poor’s detailed defence to Clurname’s pleading. Suffice it to say that it admits assigning the relevant ratings to the SCDOs, but effectively denies that in assigning the ratings it made the S&P Ratings Representations as alleged by Clurname. It also denies making the S&P Independence Representation and asserts that the ratings assigned to the SCDOs were objective opinions, independent and uninfluenced by conflicts of interest.
Importantly, in answer to the whole claim, Standard & Poor’s contends that the causes of action pleaded by Clurname are statute barred. Paragraph [139] of Standard & Poor’s Second Amended Defence is in the following terms:
In answer to the whole of the FASOC, the Respondents say that as:
(a)the alleged causes of action accrued when the Applicants acquired the SCDOs as alleged in paragraphs 87, 88 and 92 of the FASOC; or
(b)in the alternative, the alleged causes of action accrued at some other time more than 6 years before the commencement of this action;
the Applicants’ alleged causes of action did not accrue within 6 years before the commencement of this action and are therefore statute barred.
It can be observed that the pleaded limitation defence is almost entirely devoid of particulars. It does not state why the causes of action accrued when the SCDOs were acquired, or the basis upon which it is asserted that the causes of action accrued at some other time more than six years before the proceeding was commenced.
Procedural background
The proceeding was commenced on 12 August 2015 by the filing of an originating application and statement of claim. The application and pleading were served on 25 August 2015.
On 24 June 2016, Clurname filed an interlocutory application seeking leave to join a related entity of Standard and Poor’s, and to amend its originating application and pleading. That application was resolved by consent, with the result that Clurname filed an amended originating application and amended statement of claim on 17 August 2016 pursuant to rr 8.21 and 16.53 of the Federal Court Rules 2011 (Cth). On the same day, orders were made requiring Standard & Poor’s to give discovery. Those orders required Standard & Poor’s to give discovery of documents discovered by them in earlier proceedings in this Court (City of Swan & Ors v McGraw-Hill Companies, Inc & Anor, NSD 656 of 2013) (the Swan proceedings) by 1 September 2016 and to give discovery of all documents directly relevant to the assignment of ratings to the SCDOs not otherwise produced in the Swan proceedings by 15 October 2016.
Standard & Poor’s provided Clurname with electronic copies of documents covered by the 17 August 2016 discovery orders on 19 September and 20 October 2016 respectively.
On 21 October 2016, the Court ordered that the proceedings be referred to mediation, in conjunction with a number of the related proceedings. That mediation occurred in early December 2016. It would appear that considerable time and effort was expended in preparing for the mediation during the months of October to December 2016.
On 22 December 2016, orders were made requiring Standard & Poor’s to give standard discovery by 31 March 2017.
On 30 January 2017, Clurname filed an interlocutory application seeking leave to further amend its originating application and pleading.
On 31 March 2017, Standard & Poor’s provided unverified lists of documents in respect of the documents covered by the 17 August 2016 discovery orders, as well as a further unverified list of documents not previously produced. On 3 April 2017, Standard & Poor’s provided electronic copies of 23 documents not previously discovered.
It would appear that some of the documents produced by Standard & Poor’s pursuant to the discovery orders were redacted. Some of the redactions were not apparent on the face of the documents. Some of the redactions were made by Standard & Poor’s on the grounds of relevance. Others were apparently made on the basis of confidentiality. The discovery orders in this matter did not provide that Standard & Poor’s could unilaterally decide to redact documents that were required to be discovered. The basis of that right appeared to be S&P pressing for it to be included in the Electronic Exchange Protocol (EEP) which had been ordered to be agreed between the parties. However, as at early 2017, the EEP had not yet been agreed. There had, it appears, also been considerable debate on this issue in respect of the discovery provided by Standard & Poor’s in the Swan proceedings. Clurname continued to claim that it was entitled to inspect unredacted versions of the documents subject to a confidentiality regime that was ultimately agreed in May 2017. It was not until 13 June 2017, however, that Standard & Poor’s provided unredacted versions of 137 documents that had previously been redacted. The contents of some of the previously redacted documents were relevant, if not of considerable importance, to the question whether it was reasonably open to Clurname to plead the new cause of action in deceit.
On 28 June 2017, Standard & Poor’s provided Clurname with electronic copies of a further tranche of documents by way of what Standard & Poor’s called “supplementary discovery”. The parties disagreed as to the precise number of documents produced. Clurname said it was 1,504. Standard & Poor’s said it was 1,878, though only 1,379 unique documents accounting for duplicates. It is unnecessary to resolve that dispute. Little turns on it. What is relevant is that no real explanation was given for the delay in producing those documents. Clurname contended that a number of documents which are important to the new causes of action in the proposed further amended pleading were not discovered until 28 June 2017.
As events transpired, the 30 January 2017 interlocutory application to further amend the originating application and pleading was not opposed by Standard & Poor’s. It would appear that the position taken by Standard & Poor’s was ultimately determined by the successful outcome of the amendment application in Gloucester Shire Council v Fitch Ratings, Inc (No 2) [2017] FCA 248 (the Gloucester proceedings), which concerned amendments substantially similar to those proposed by Clurname in the 30 January 2017 amendment application. The further amended originating application and pleading were eventually filed on 15 June 2017. Standard & Poor’s filed its defence to the further amended pleading on 30 June 2017.
Standard & Poor’s solicitors were first notified that Clurname would seek to further amend its originating application and pleading, and would allege deceit on the part of Standard & Poor’s, in email correspondence and at a case management conference in one of the related proceedings on 14 July 2017. Clurname filed the current interlocutory application on 16 August 2017. A copy of the proposed Second Further Amended Statement of Claim (SFASOC) was annexed to the application. It follows that Standard & Poor’s has been aware of the form of the proposed amended pleading since 16 August 2017.
There was a case management hearing of this and a number of the related Standard & Poor’s matters on 17 August 2017. Standard & Poor’s advised the Court that it had not determined whether or not to resist Clurname’s application to amend and submitted that the interlocutory application should not be set down for hearing. Nonetheless, and after some debate, the interlocutory application was set down for hearing on 20 and 21 September 2017. Standard & Poor’s was directed to file any application to vacate that hearing date by 6 September 2017. Standard & Poor’s did subsequently apply to vacate the hearing. It argued that it had insufficient time to prepare for the hearing of the amendment application. That application was ultimately allowed and the interlocutory application for leave to amend was set down for hearing on 10 October 2017. Standard & Poor’s had, however, wanted even more time to respond to the leave application.
As was noted earlier, the hearing of the interlocutory application proceeded over four days. The parties filed voluminous affidavits sworn or affirmed by their respective solicitors. The documentary exhibits to those proposed affidavits were vast and would, in ordinary circumstances, be considered to be bordering on oppressive. For this and the associated Standard & Poor’s proceedings, however, they were par for the course. They were nonetheless burdensome. Both solicitors were cross-examined at some length. The parties filed lengthy and detailed written submissions raising many disputed issues of fact and law. They provided a joint bundle of authorities that filled nine lever-arch folders.
CLURNAME’S PROPOSED AMENDMENTS
The critical amendments to the existing pleading that are proposed by Clurname relate to a new cause of action in deceit. There are other proposed amendments, including a new cause of action for equitable unconscionability, however Standard & Poor’s opposition to the grant of leave to amend focussed almost entirely on the proposed new claim in deceit. That new claim is detailed in paragraphs [132] to [202] of the proposed amended pleading, the proposed SFASOC. The proposed amended originating application adds a new common question, being whether Standard & Poor’s committed the tort of deceit.
While the pleading of the proposed new claim in deceit is fairly lengthy and detailed, there are essentially two critical allegations.
The first critical allegation is that in making the S&P Ratings Representations, Standard & Poor’s either knew that those representations were false or, in the alternative, was recklessly indifferent to their truth: SFASOC [197]. In very simple terms, Clurname alleges (or seeks to allege) that Standard & Poor’s was aware that the ratings for the Pure and Oasis SCDOs lacked reasonable grounds, or that there was substantial doubt about whether the ratings were based on reasonable grounds, because it was aware that there were difficulties with the new version of the model used to arrive at the ratings, version 3 of the CDO Evaluator, or issues or inaccuracies with some of the assumptions and inputs used in the model.
Needless to say, Standard & Poor’s ratings methodology was complex. It is sufficient to note that the CDO Evaluator was a simulation model which predicted, or at least endeavoured to predict, the likely future performance of the SCDOs in terms of their ability to repay principal and interest. One of key assumptions or inputs in the model concerned statistical estimates of the likelihood of there being defaults or credit events in two or more of the underlying securities at the same time. Those assumptions or inputs were called “correlation”.
The essence of Clurname’s case is that Standard & Poor’s knew that its ratings lacked reasonable grounds because: it used correlation assumptions in CDO Evaluator version 3 which it knew were lower than estimates based on historical data and did so to avoid the negative effects of using higher correlation estimates (SFASOC [194.1]; [166]-[170]); the CDO Evaluator version 3 used a static correlation assumption (an assumption that correlation remains stable over time) in circumstances where Standard & Poor’s knew it was incorrect and wrong to do so (SFASOC [194.2]; [171]-[173]); it was aware that there was significant uncertainty as to the soundness of the model assumptions used by CDO Evaluator version 3 which raised significant doubts about the reliability of the ratings assigned based on the output of the CDO Evaluator model (SFASOC [194.3], [174]-[178]; and it was aware that business considerations had influenced Standard & Poor’s ratings methodology (SFASOC [194.4]; [179]-[190]).
The particulars of those allegations in the proposed amended pleading refer to certain documents and identify the senior employees whose knowledge Clurname alleges can and should be imputed or attributed to Standard & Poor’s (see also SFASOC [193]). The named employees are Mr Kai Gilkes, Mr Perry Inglis, Ms Patrice Jordan, Mr Richard Gugliada, Mr Norbert Jobst and Mr Michael Drexler. At relevant times: Mr Gilkes was the Managing Director, Structured Finance Ratings and Head of Standard & Poor’s Global Qualitative Group; Mr Inglis was Managing Director, Structured Finance Ratings; Ms Jordan was Managing Director, International Structured Finance and subsequently Managing Director in charge of Standard & Poor’s Global CDO Group; Mr Gugliada was Global Practice Leader, SCDOs; Mr Jobst was Director, Structured Finance Ratings and Mr Drexler was an Analyst in Criteria Group, CDO Group.
The second critical allegation is that when it made the S&P Independence Representation, Standard & Poor’s either knew it was false or, in the alternative, was recklessly indifferent to its truth: SFASOC [200]. In essence, Clurname alleges (or seeks to allege) that Standard & Poor’s was aware that its ratings of the SCDOs were not objective, independent, and uninfluenced by any conflicts of interest that might compromise its analytical judgement regarding the credit risks that the SCDOs posed to investors, or that there was substantial doubt about those matters, because: business considerations had influenced Standard & Poor’s ratings methodology (SFASOC [198], [194.4]; [179]-[190]); and the S&P Independence Representation was made with the intention that investors would rely on that representation in deciding whether to rely on Standard & Poor’s ratings in deciding to invest in the SCDOs (SFASOC [199]; [65], [65AA]; [133]-[136]. The particulars of those allegations again make it clear that the allegations are based on internal Standard & Poor’s emails and reports which were authored by or sent to named senior employees whose knowledge was, on Clurname’s case, to be imputed to Standard & Poor’s.
The general thrust of Clurname’s deceit case is that it can be inferred from the documents identified in the proposed amended pleading that each of the individuals named in the pleading, each of whom was a senior officer of Standard & Poor’s, was aware that the methodology employed by Standard & Poor’s in rating SCDOs at the relevant time was driven primarily by, or at least materially influenced by, business and economic imperatives and Standard’s & Poor’s relationship with SCDO arrangers. In short, Standard & Poor’s drive to maximise market share, revenue and profitability from rating SCDOs and similar financial products, together with its mutually beneficial arrangements and relationships with arrangers, caused it to knowingly utilise unreasonable correlation estimates and assumptions and disregard other known uncertainties in its modelling assumptions.
Two other parts of the proposed amended pleading warrant brief consideration.
First, the proposed amendments include the insertion of an additional particular of the allegation that Standard & Poor’s did not have reasonable grounds for concluding that the relevant SCDOs should be assigned the ratings that they were ultimately assigned. That additional particular concerns Standard & Poor’s adoption of a specific “quantile table” to rate CDOs which was different to the quantile table that was used to rate corporate bonds. The additional particular (particular (f) to SFASOC [82.5]) is in the following terms:
Developed for CDO Evaluator version 3.0 (which was used to rate the SCDOs) a ratings on quantile table (the CDO Ratings Quantile Table) to determine the rating for CDOs which was not identical to the ratings quantile table used by S&P to rate corporate bonds (the CDO Corporate Ratings Table) when the risk of CDOs structured in the manner of the SCDOs defaulting was determined only by the risk of corporate bonds of the Reference Entities defaulting. For example, a CDO with the same modelled probability of default (at 0.927%) would only attain an A+ rating using the CDO Corporate Ratings Table versus an AA rating using the CDO Ratings Quantile Table utilised by S&P for SCDOs. The use of the CDO specific ratings quantile table enabled the SCDOs to achieve a higher rating than they would have achieved had the ratings quantile for corporate bonds been utilised. There was no reasonable basis for S&P to utilise the CDO Ratings Quantile Table to determine the rating of the SCDOs instead of the CDO Corporate Ratings Table.
Second, as noted earlier, the proposed amendments introduce a new claim of unconscionable conduct in equity (SFASOC [121A]). That cause of action is based on the same factual allegations as the existing claim of unconscionable conduct in contravention of s 12CB of the ASIC Act (see SFASOC [121]). It is unnecessary to say anything further in relation to this additional cause of action. Standard & Poor’s did not really make any specific submissions in relation to it, other than some relatively inconsequential (and unmeritorious) submissions concerning the sufficiency of the particulars of that proposed claim.
CLURNAME’S CASE IN SUPPORT OF AMENDMENT
Clurname relied, in support of its amendment application, on affidavits sworn by its solicitor, Ms Amanda Banton. Ms Banton’s affidavits were relatively lengthy. Her first affidavit exhibited six very large bundles of documents. Her second affidavit exhibited a further bundle of documents. A further tender bundle, containing documents not referred to in Ms Banton’s affidavits, was also produced at the hearing. All up, Ms Banton’s exhibits and the tender bundle filled 12 lever-arch folders. The global tender of the entire exhibit and tender bundle was rejected. Ultimately 41 documentary exhibits were tendered from the initial exhibit bundles, though one of them (exhibit A29) comprised all of the documents referred to in the particulars to Clurname’s proposed cause of action in deceit. The documents that were admitted into evidence were the documents which were the subject of cross-examination, or which the Court was taken to, either specifically or in general terms, in the parties’ submissions.
Ms Banton’s evidence in broad terms included a chronology of the events which led her to consider and investigate the availability of a claim in deceit. Those events included, in particular, Standard & Poor’s pleading of a limiting defence and the eventual discovery of documents by Standard & Poor’s that, when considered in context, provided a reasonable basis for the claim. Ms Banton also explained, or endeavoured to explain, why it took some months before the claim could be properly formulated in the proposed amended pleading. In short terms, Ms Banton referred to deficiencies, issues or delays with Standard & Poor’s discovery, the need to brief expert witnesses, the need for the proposed amended pleading to be drafted or settled by counsel, and the complexity and difficulty of the subject-matter of the proposed amendments.
Ms Banton’s affidavit also addressed facts or issues relating to the importance of the amendments to Clurname’s case and the prospect of prejudice to Standard & Poor’s arising from the amendments. In relation to the importance of the amendments, Ms Banton asserted that the proposed amendments were very important to Clurname’s case because they are capable of providing an answer to Standard & Poor’s limitation defences. In relation to prejudice to Standard & Poor’s, Ms Banton contended that there was unlikely to be any prejudice because the documents that support the deceit claim will be deployed by Clurname in support of its existing claims in any event, and therefore will have to be answered by Standard & Poor’s even if leave to amend is not granted. She also noted that it would be surprising if Standard & Poor’s had not already attempted to obtain instructions from the relevant six senior employees involved in the communications and documents that provide the basis of the deceit claim, as part of Standard & Poor’s defence of various proceedings brought in the United States.
Ms Banton was cross-examined at some length, though ultimately not to great effect. It is unnecessary to refer to that cross-examination in any detail. Suffice it to say that the general thrust of what was put to Ms Banton was that she had not investigated whether Clurname had a claim in deceit against Standard & Poor’s with due diligence or despatch, and that she was aware of all of the facts and documents that she needed to formulate the claim in deceit by August 2015, when the proceeding was commenced, if not before. Ms Banton denied that was the case. She maintained, in effect, that in all the circumstances she could not have formulated the claim any earlier than she did. The question whether that and other aspects of Ms Banton’s evidence should be accepted is dealt with later in the context of addressing the relevant discretionary considerations, including delay.
Clurname’s submissions in support of the grant of leave to amend were, in summary:
(a)the proposed amendments arose out of Standard & Poor’s discovery, which was not complete until 28 June 2017;
(b)Clurname brought the application as soon as possible after that date and could not reasonably have done so any sooner;
(c)the amendments are very important to Clurname’s case because they provide a basis to overcome a limitation defence raised by Standard & Poor’s to most of the existing claims;
(d)there is no prejudice to Standard & Poor’s because the amendments are based on material which it can reasonably be inferred that Standard & Poor’s has been aware of for a long time;
(e)the documentary case in support of the new claims in deceit and unconscionability will be advanced in support of the existing claims in any event;
(f)the expert evidence for the new claims in deceit and unconscionability is the same as the expert evidence for the existing claims, so Standard & Poor’s will have to meet that case in any event;
(g)consequently, the amendments will not result in the loss of the trial date; and
(h)alternatively, any prejudice to Standard & Poor’s can be managed by orders extending the time for service of Standard & Poor’s evidence and for costs thrown away.
STANDARD & POOR’S OPPOSITION TO THE AMENDMENT
Standard & Poor’s primarily relied on an affidavit sworn by its solicitor, Mr Timothy Grave, in opposition to the amendment application. The body of Mr Grave’s affidavit was 69 pages long (single spaced) and included 295 paragraphs. Like Ms Banton’s affidavit, it exhibited a very large bundle of documents. That bundle ran to over 3000 pages and filled 4 lever-arch folders. As was the case with Ms Banton’s documentary exhibits, the global tender of the bundle exhibited to Mr Grave’s affidavit was rejected. Ultimately only 17 documents were tendered, though many of them were very lengthy.
Mr Grave’s affidavit evidence addressed the following topics: a general background to and overview of the proceedings; a history or chronology of the previous amendments to the pleading; a dissertation on the new legal and factual issues raised by the proposed amendments; a discussion of the history of other related or similar actions in Australia against ratings agencies and Clurname’s solicitor’s involvement therein; arguments in support of the proposition that Clurname’s existing and proposed new causes of action are statute barred; a chronology of events said to support the proposition that the new causes of action in deceit could have been readily discovered by Clurname’s solicitor at a much earlier point in time; arguments in support of the assertion that Australia is an inappropriate forum for the proposed cause of action in deceit; a chronology of events relating to Standard & Poor’s discovery of documents in purported compliance with the Court’s orders; and facts that were said to show that Standard & Poor’s will be unfairly prejudiced by the proposed amendment.
Mr Grave was also cross-examined at some length. It is both unnecessary and undesirable at this point to discuss in any detail Mr Grave’s evidence, including the issues that arose during cross examination. Those aspects of his evidence that are important to the resolution of the issues arising on this application will be discussed in context later. Suffice it to say at this stage that the main areas of Mr Grave’s evidence that were tested, or were the subject of challenge, in cross-examination were: his contention that Ms Banton could and should have investigated the possibility of a deceit claim against Standard & Poor’s earlier than she apparently did; the adequacy of Standard & Poor’s discovery; his assertion that if leave to amend was granted, Standard & Poor’s would effectively have to begin investigating a number of new issues “from scratch”; the steps that Mr Grave had taken to ascertain whether Standard & Poor’s United States attorneys had, in the context of claims made against Standard & Poor’s in the United States, conducted investigations and gathered documents in respect of the sorts of issues raised by the proposed deceit claim; and the steps, if any, that had been taken by Mr Grave to ascertain whether the former Standard & Poor’s employees referred to in the proposed pleading concerning the deceit claim were willing and available to assist Standard & Poor’s if the trial is heard in Sydney in March 2018.
Standard & Poor’s also relied on affidavit evidence from an expert in the law of the United States of America, Professor Ethan J Leib. In short terms, Professor Leib’s evidence was that the equivalent claim to the deceit claim that Clurname wishes to plead is, as a matter of New York law, the cause of action for common law fraud. It may be noted that Professor Leib’s articulation of the elements of the cause of action for common law fraud tend to indicate that the elements are relevantly the same as the elements of a cause of action in deceit based on an alleged false misrepresentation. Professor Leib also stated that a claim for common law fraud in New York must be commenced within the greater of six years from the date of the fraud or two years from the time the plaintiff discovered or could have discovered the fraud with reasonable diligence.
Standard & Poor’s submissions in opposition to the grant of leave to amend were, in summary:
(a)there are serious and insuperable deficiencies in the pleading of the new claims;
(b)the deceit claim is governed by New York law and is statute barred, which has the consequence, among other things, that the Court does not have the power to allow the amendments;
(c)Australia is a clearly inappropriate forum for the resolution of the deceit claim;
(d)delay is a particularly serious consideration where a party seeks to plead fraud at a late stage in a proceeding;
(e)the delays by Clurname in bringing forward the new claims are serious and prejudicial to Standard & Poor’s and sufficient in themselves for the amendment application to be refused;
(f)the new claims for relief do not arise out of the same facts or substantially the same facts as those already pleaded for the purpose of r 8.21(1)(g)(i) of the Rules;
(g)Clurname bears the burden or onus of persuading the Court that the amendment application should be allowed; and
(h)any doubts in relation to the resolution of the limitation period issue resulting from the existence of disputed factual issues militates in favour of the discretion being exercised to refuse the amendment application on the basis that the plaintiff can bring a fresh action if the amendments are not allowed.
RELEVANT PRINCIPLES
The relevant principles in relation to application for leave to amend were recently considered in somewhat analogous circumstances in Gloucester at [84]-[89]. The analysis of the principles in Gloucester is repeated below for convenience.
The power of the Court to grant or refuse leave to amend under rr 8.21 and 16.51 of the Rules must be exercised in the way that best promotes the Court’s overarching purpose to facilitate the just resolution of disputes according to law as quickly, inexpensively and efficiently as possible: s 37M(3) of the FCA Act; Caason Investments Pty Ltd v Cao (2015) 236 FCR 322 at 326 [19] and the cases there cited. The Court’s power to grant leave to amend is broad and has the remedial objective of ensuring that any defect in the pleadings is cured and that the real questions in the controversy are properly agitated: Aon Risk Services Australia Ltd v Australian National University (2009) 239 CLR 175 at 185 [14]; Caason Investments at 327 [20]. The object of the Court is not to punish parties for mistakes made in the course of their case, but to correct errors with the result that a decision can be made on the real matters in controversy: Clough v Frog (1974) 4 ALR 615 at 618; (1974) 48 ALJR 481 at 482; Caason Investments at 327 [20].
Leave to amend should be granted unless the proposed amendment is futile, such that the issue sought to be raised by the amendment has no reasonable prospects of success, or would be liable to be struck out as not raising a reasonable cause of action, or where the amendment would cause substantial prejudice or injustice to the opposing party in a way that cannot be compensated by the award of costs: Research in Motion Ltd v Samsung Electronics Australia Pty Ltd (2009) 176 FCR 66 at 69-70 [21]-[22]; Medich v Bentley-Smythe Pty Ltd [2010] FCA 494 at [8]; Caason at 327 [21].
There are limits to be placed upon re-pleading. An amendment application should not be approached on the basis that a party is entitled to raise an arguable claim subject to the payment of costs by way of compensation: Aon at 217 [111]. An order for costs may not always provide sufficient compensation and therefore achieve a just resolution. Parties are also entitled to expect that litigation be resolved with reasonable despatch: Richards v Cornford (No 3) [2010] NSWCA 134 at [44].
In Tamaya Resources Ltd (in liq) v Deloitte Touche Tohmatsu (A Firm), in the matter of Tamaya Resources Ltd (in liq) [2015] FCA 1098 at [127], Gleeson J provided a useful summary of the types of matters that the Court should consider in exercising its discretion whether or not to grant leave to amend.
The principles articulated by the High Court in Aon apply to matters in this Court: Cement Australia Pty Ltd v Australian Competition and Consumer Commission [2010] FCAFC 101; (2010) 187 FCR 261 at [43]. Relevant matters the Court is to consider include:
ŸThe nature and importance of the amendment to the party applying for it: Aon at [102];
ŸThe extent of the delay and the costs associated with the amendment: Aon at [102];
ŸThe prejudice that might be assumed to follow from the amendment, and that which is shown: Aon at [5], [100] and [102];
ŸThe explanation for any delay in applying for that leave: Aon at [108]; and
ŸThe parties’ choices to date in the litigation and the consequences of those choices: Aon at [112] and Luck v Chief Executive Officer of Centrelink [2015] FCAFC 75 (“Luck“) at [44];
ŸThe detriment to other litigants in the Court: Aon at [93], [95] and [114] and Luck at [44]; and
ŸPotential loss of public confidence in the legal system which can arise where a court is seen to accede to applications made without adequate explanation or justification: Aon at [5], [24] and [30].
Gleeson J did not suggest that this list was exhaustive, or that each of the matters in the list would necessarily be material in every case. At [128] her Honour noted that the weight to be given to these considerations, individually and in combination, and the outcome of the balancing process generally, may vary depending on the particular facts of the case.
The onus is on the party seeking leave to amend to persuade the Court that such leave should be given: Dye v Commonwealth Securities Limited (No 2) [2010] FCAFC 118 at [17].
CONSIDERATION
The consideration of whether Clurname should be granted leave to amend can conveniently be addressed by first considering whether, as contended by Standard & Poor’s, the Court does not have power to grant leave to amend, and whether the proposed amendments would be futile because they would be liable to be struck out as defective or as not raising a reasonably arguable cause of action. Attention can then be given to the discretionary considerations.
The Court’s power to grant Clurname leave to amend
As has already been noted, Standard & Poor’s contended that the Court did not have the power to grant Clurname leave to file the SFASOC because the deceit claim in it was statute barred. That contention in turn hinged on the contention that the proper law for the determination of the claim in deceit was the law of New York. A number of other submissions advanced by Standard & Poor’s for why leave to amend should not be granted also hinged on that proposition. It is accordingly convenient to address the choice of law issue first.
The proper law governing the deceit claim
Standard & Poor’s submitted that for causes of action in tort, the applicable choice of law rule is that matters of substance are governed by the law of the place of commission of the tort in question. So much so may be accepted: Dow Jones & Co Inc v Gutnick (2002) 210 CLR 575 at [9]; Regie Nationale des Usines Renault SA v Zhang (2002) 210 CLR 491. In that context, Standard & Poor’s submitted that the place of the commission of the tort is the place where the relevant tortious conduct occurred. In respect of a cause of action based on fraud or deceit, Standard & Poor’s submitted that the critical element of the cause of action is the state of mind of the wrongdoer. In Standard & Poor’s submission, in this case the relevant conduct therefore occurred in New York because that was where the SCDO ratings methodology, criteria and assumptions, which Clurname alleged were known to be defective or flawed, were formulated by Standard & Poor’s. Standard & Poor’s also appeared to rely on the fact that the officers or employees of Standard & Poor’s who were responsible for the ratings methodology, criteria and assumptions, were stationed in New York.
Standard and Poor’s contention that the proper law for the determination of Clurname’s proposed deceit claim is the law of New York is wrong and is rejected. It is based on an erroneous and misleading characterisation of the tortious conduct that provides the foundation for Clurname’s proposed claim in deceit.
It is tolerably clear that Clurname’s proposed claim in deceit is that Standard & Poor’s made representations (the S&P Ratings Representations and the S&P Independence Representation) to it and others in Australia which Standard & Poor’s knew to be false, or in respect of which it was recklessly indifferent. Those representations were made when the ratings were issued in circumstances where Standard & Poor’s caused or permitted or authorised the fact of its ratings to be published or disseminated, including in Australia, and was aware that the ratings would be communicated to and relied on by potential investors in Australia (SFASOC [61], [62], [63], [64], [65], [84], [85]). Clurname’s case is that it relied on the ratings and representations when deciding to invest and, most importantly, in proceeding with the acquisition of the SCDOs (SFASOC [91], [91A], [95]). The essential conduct that is the subject of Clurname’s deceit case is the conduct of Standard & Poor’s in knowingly making false representations to it and other investors in Australia. It is not, as Standard & Poor’s contended, the determination of the ratings methodology and criteria for SCDOs.
A cause of action in deceit that is based on fraudulent misrepresentations that were received in Australia, or that the representor could reasonably expect would be relied on in Australia, relevantly occurs in Australia and is governed by Australian law. That is because the relevant representation is treated as having been made in Australia, even if the representor was based overseas: Voth v Manildra Flour Mills Pty Ltd (1990) 171 CLR 538 at 568. In Voth, the plurality said (at 568):
If a statement is directed from one place to another place where it is known or even anticipated that it will be received by the plaintiff, there is no difficulty in saying that the statement was, in substance, made at the place to which it was directed, whether or not it is there acted upon. And the same would seem to be true if the statement is directed to a place from where it ought reasonably to be expected that it will be brought to the attention of the plaintiff, even if it is brought to attention in some third place. But in every case the place to be assigned to a statement initiated in one place and received in another is a matter to be determined by reference to the events and by asking, as laid down in Distillers, where, in substance, the act took place.
Standard and Poor’s submitted that when one looked at the events and asked where in substance the act took place, the answer would be New York because that was the place where Standard & Poor’s determined its ratings methodologies, criteria and model assumptions. That submission is rejected. That is because the relevant tortious conduct was Standard & Poor’s making the S&P Ratings Representations and the S&P Independence Representations in circumstances where it knew and authorised the communication of those representations to investors in Australia, or where it knew or could reasonably expect that the representations would be received and relied on by investors in Australia.
There could be no doubt that Clurname’s existing causes of action based on the allegation that the relevant representations (the S&P Ratings Representations and the S&P Independence Representation) were misleading and deceptive are governed by Australian law because the relevant conduct, the representations, occurred in Australia. Standard & Poor’s did not contend otherwise. That the representations were false or misleading because of events or circumstances that occurred outside Australia, for example the assignment of the ratings and the circumstances relied on by Clurname to establish that the relevant representations arising from the ratings were false, is irrelevant: ABN AMRO Bank NV v Bathurst Regional Council (2014) 224 FCR 1 at [739]-[744]. So too is the fact that the senior employees of Standard & Poor’s whose knowledge of the falsity of the representations can, on Clurname’s case, be imputed to Standard & Poor’s, may have been situated outside Australia.
Even if the location of the persons who knew that the representations were false is of some relevance, Standard & Poor’s have not established that all of those persons were located in New York. As discussed in more detail later, three of the six people identified in Clurname’s proposed amended pleading appear to have been based in London, not New York. That includes perhaps the most senior of the employees, Mr Gilkes.
It should also be noted that Standard & Poor’s further submitted, in the context of the choice of law issue, that Clurname’s case as pleaded was that the Commonwealth Bank made the relevant representations and that Clurname relied on, or was induced by, the Commonwealth Bank’s representations, not any representation made by Standard & Poor’s. That submission must be considered in light of the fact that Standard & Poor’s did not object to previous amendments to the pleading which dealt with the position of the Commonwealth Bank and questions of reliance and inducement. Those amendments followed the detailed analysis of similar pleaded allegations in Gloucester. Standard & Poor’s did not oppose the previous amendments, or seek to strike out the pleading or have the claim summarily dismissed, on the basis that Standard & Poor’s did not make the alleged representations, or that Clurname relied on what the Commonwealth Bank said and did, not on anything done by Standard & Poor’s. It is, to say the least, somewhat surprising, then, that Standard & Poor’s raised that argument in opposition to the present amendment application. It is, in any event, rejected for the reasons given in Gloucester.
Is the proposed deceit claim statute barred?
As has already been noted, Standard & Poor’s contention that the proposed cause of action in deceit was statute barred was primarily based on the limitation period applicable to the cause of action for common law fraud as a matter of New York law. For the reasons already given, the proposed claim in deceit is governed by Australian law, not New York law. It follows that the limitation period as a matter of New York law is irrelevant. It should perhaps be noted, however, that even accepting Professor Leib’s opinion concerning the limitation period for a common law action in fraud as a matter of New York law, if the evidence adduced by Clurname in support of the amendment application is accepted, Clurname’s action would not be statute barred as a matter of New York law. That is because the effect of Ms Banton’s evidence was that the alleged fraud by Standard & Poor’s was not discovered, and was not discoverable with reasonable diligence, before August 2017. Thus the limitation period would not expire until August 2019.
Putting to one side the position under New York law, Standard & Poor’s contended that the deceit claim was statute barred by reason of s 14 of the Limitation Act 1969 (NSW), which provides that a cause of action founded on tort is not maintainable if brought after the expiration of a limitation period of six years running from the date on which the cause of action first accrues to the plaintiff. In Standard & Poor’s submission, the proposed cause of action in deceit accrued when Clurname was induced to acquire the SCDO’s by reason of the allegedly false representations. That was on 6 July 2006, which was more than six years before the proceeding was commenced. It is to be noted, in that regard, that Standard & Poor’s has pleaded, in its defence, that the existing causes of action are statute barred on the same basis. The same six year limitation period applies to the actions under the Corporations Act and the ASIC Act: see s 1041I(2) of the Corporations Act and s 12GF(2) of the ASIC Act.
Clurname’s response to the contention that the proposed claim in deceit was statute barred was twofold.
First, while Clurname accepted that the cause of action in deceit accrued when damage was suffered, it submitted that it did not suffer damage when it acquired the relevant SCDOs. Rather, it did not suffer any damage until the first date of default of the SCDOs, which was between 2 November 2009 and 23 November 2011. In that regard, it relied on a line of authorities which, in its submission, establish that damage is not sustained merely because a party is induced to enter into a disadvantageous transaction by misrepresentation; rather, there must be “actual damage, as distinct from the risk or prospect of damage or contingent damage” which is “measurable or beyond what can be regarded as negligible”: Wilson v Rigg (2002) 36 MVR 451 at [23]; see also Wardley Australia Ltd v The State of Western Australia (1992) 175 CLR 514 at 527-529, 536.
Clurname contended that the tranches of the relevant SCDOs held by it first suffered credit events breaching the attachment point on 2 November 2009, 24 December 2009 and 9 November 2010. Each of those dates is less than six years before the date on which the proceedings were commenced. On that basis it contends that the existing claims are not statute barred. Clurname submitted, relying on Gloucester at [234]-[238] and Oztech Pty Ltd v Public Trustee of Queensland (No 2) [2015] FCA 1485 at [61], that the proposed amended pleading raising the deceit claim should take effect from the date the proceeding was commenced. Accordingly, in its submission the new deceit claim would also not be statute barred.
Standard & Poor’s did not submit that Clurname’s argument that it did not relevantly suffer loss or damage until it first suffered credit events breaching the attachment point was hopeless or not reasonably arguable. That perhaps explains, at least in part, why Standard & Poor’s have not sought to strike out or seek summary dismissal of the existing claims on the basis that they are statute barred. In any event, it is open to conclude not only that Clurname has at least a reasonably arguable case that the existing claims are not statute barred, but also at least a reasonably arguable case that the proposed new deceit claim is also not statute barred for the same reason. In the case of some of the relevant SCDOs, however, that may depend on whether the date upon which the amendments were to take effect was the date that the proceeding was commenced, as opposed to the date that leave to amend was granted. More will be said concerning that issue later.
Second, and perhaps more significantly for present purposes, Clurname relied on s 55 of the Limitation Act, which relevantly provides as follows:
55 Fraud and Deceit
(1)Subject to subsection (3) where:
(a)there is a cause of action based on fraud or deceit, or
(b)a cause of action or the identity of a person against whom a cause of action lies is fraudulently concealed,
the time which elapses after a limitation period fixed by or under this Act for the cause of action commences to run and before the date on which a person having (either solely or with other persons) the cause of action first discovers, or may with reasonable diligence discover, the fraud deceit or concealment, as the case may be, does not count in the reckoning of the limitation period for an action on the cause of action by the person or by a person claiming through the person against a person answerable for the fraud deceit or concealment.
(2)Subsection (1) has effect whether the limitation period for the cause of action would, but for this section, expire before or after the date mentioned in that subsection.
(3)For the purposes of subsection (1), a person is answerable for fraud deceit or concealment if, but only if:
(a)the person is a party to the fraud deceit or concealment, or
(b)the person is, in relation to the cause of action, a successor of a party to the fraud deceit or concealment under a devolution from the party occurring after the date on which the fraud deceit or concealment first occurs.
(4)Where property is, after the first occurrence of fraud deceit or concealment, purchased for valuable consideration by a person who is not a party to the fraud deceit or concealment and does not, at the time of the purchase, know or have reason to believe that the fraud deceit or concealment has occurred, subsection (1) does not, in relation to that fraud deceit or concealment, apply to a limitation period for a cause of action against the purchaser or a person claiming through the purchaser.
There could be little doubt that the proposed new claim in deceit falls within s 55(1)(a) of the Limitation Act. Accordingly, the six year limitation period, which would otherwise commence to run when the cause of action accrued, would be postponed until the time that Clurname first discovered, or should with reasonable diligence have discovered, the alleged fraud or deceit. It should be noted that Clurname also relied on s 55(1)(b) and contended that the causes of action it had against Standard & Poor’s were fraudulently concealed. For present purposes, however, it is sufficient to consider the potential application of s 55(1)(a).
A person can be said to have relevantly discovered a fraud if they know the facts capable of proving a prima facie case: Feiglin v Ainsworth [2014] VSC 376. It would follow that it can be concluded that a person should, with reasonable diligence, have discovered a fraud if the person would have discovered facts capable of proving a prima facie case if they had exercised reasonable diligence.
What reasonable diligence would require must be evaluated by reference to the particular facts and circumstances of the case. Ordinarily, before a person could reasonably be expected to pursue an inquiry with a view to ascertaining whether a fraud has been perpetrated, something must have put the person on notice, or raised a suspicion, in respect of that matter: CE Heath Underwriting & Insurance (Australia) Pty Ltd v Daraway Constructions Pty Ltd (unreported, Supreme Court of Victoria, Batt J, 3 August 1995) at 121-2; Clark v Clark (1882) 8 VLR (E) 303 at 328. Even then, the person might not reasonably be expected to do everything possible using all means at their disposal: Peco Arts Inc v Hazlitt Gallery Ltd [1983] 1 WLR 1315 at 1322-3. The type of enquiry that might be expected must be assessed having regard to how a person carrying on a business of the relevant kind would act if they had “adequate but not unlimited staff and resources and were motivated by a reasonable but not excessive sense of urgency”: Paragon Finance plc v D B Thakerar & Co [1999] 1 All ER 400 at 418. And the enquiry that might be expected must be one that, if made, would have led to the discovery of the facts revealing the fraud: CE Heath at 121-2.
Clurname contended that it did not discover, and could not with reasonable diligence have discovered, the alleged deceit by Standard & Poor’s until August 2017. It relied in that regard on Ms Banton’s evidence. Standard & Poor’s contended that Ms Banton should with reasonable diligence have discovered the deceit claim at some earlier time, though it is unclear precisely when it was said she should have discovered the claim. Much of the questioning of Ms Banton was directed to the period from August 2015, when these proceedings were commenced. Most of Standard & Poor’s submissions were also directed to that date.
Ms Banton’s evidence was that she did not discover the alleged deceit by Standard & Poor’s until August 2017, or thereabouts. In very short terms, Ms Banton’s evidence was that she did not have a reasonable basis to file (or seek leave to file) an amended pleading including the proposed deceit claim until she, counsel briefed by her, and expert witnesses retained by her, had fully considered the documents discovered by Standard & Poor’s in this proceeding. Despite being ordered to give specific discovery in September and October 2016, and standard discovery by March 2017, a number of documents that are important to the proposed deceit pleading were not discovered until “supplementary” discovery was provided in June 2017. Other important documents, in particular copies of depositions taken in proceedings in the United States, were also not discovered in an unredacted form until May and June 2017.
As discussed in more detail later in the context of discretionary considerations, Standard & Poor’s has not given any, or any adequate, explanation or justification for the late discovery. Some of the documents that were not discovered until June 2017 are self-evidently relevant to Clurname’s existing claims. So much so appeared to be conceded by Mr Grave when cross-examined about Standard & Poor’s discovery.
More importantly, it also could not be gainsaid that some of the documents that were not discovered until June 2017 are relevant to the proposed deceit claim. It suffices to give two examples, both of which are documents created in early December 2005, shortly before CDO Evaluator version 3 was rolled out.
As noted earlier, Clurname’s proposed deceit case is based in part on the allegation that Standard & Poor’s knew that its ratings lacked reasonable grounds because: it used correlation assumptions in its CDO Evaluator model version 3 which it knew were lower than historical averages and did so to avoid the negative effects of using higher correlation estimates; it was aware that CDO Evaluator version 3 used a static correlation assumption in circumstances where it was incorrect and wrong to do so; it was aware that there was significant uncertainty as to the soundness of the model assumptions used by the CDO Evaluator; and it was aware that business considerations had influenced Standard & Poor’s ratings methodology.
One of the documents not produced until June 2017 was an email from Mr Inglis to Mr Gilkes, which forwarded an email from Mr Fabienne Michaux to colleagues within Standard and Poor’s (Exhibit A19). In the forwarded email, Mr Michaux makes a case for elements of the CDO Evaluator model version 3, roughly a week before its release, which appears to paraphrase comments made by Mr Gilkes. Among other things, Mr Michaux talks of the importance of striking a balance between the desire not to “grandfather” Standard & Poor’s’ credit decisions, while at the same time “managing the impact of the model changes”. Mr Michaux goes state that the number one “franchise” issue, which Mr Grave accepted in cross examination to mean Standard & Poor’s’ business, arising out of the new CDO evaluator model was “rating something AAA one day and dumping it to bare investment grade the next – especially anything rated after knowledge of [CDO Evaluator version 3]”. In cross-examination, Mr Grave accepted that the email suggested that at that time Standard & Poor’s was discussing the concern that different versions of the CDO Evaluator model would produce different ratings outcomes. Despite this concession, Mr Grave gave no convincing explanation for why the document was not discovered before June 2017.
A second document, an internal Standard & Poor’s PowerPoint presentation titled ‘CDO Product & Infrastructure Steering Committee Kick-off Meeting’ (Exhibit A20), stated that the Steering Committee’s charter included to “ensure that the development [of] CDO product[s] and infrastructure are aligned to CDO business strategy”. Relevantly, Mr Gilkes was named as a member of the Steering Committee.
It is not difficult to see the potential relevance of these two documents to Clurname’s proposed claim in deceit. No satisfactory explanation has been given for why they were not discovered until mid-2017. There were other documents about which the same could be said.
Standard & Poor’s has also provided no satisfactory explanation for some of the redactions that were initially made to some of the discovered documents. It again cannot be gainsaid that some of the previously redacted material is highly relevant to the proposed deceit claim. Again, two examples suffice to demonstrate that point.
Amongst the material initially discovered by Standard & Poor’s in 2016 was a heavily redacted transcript of a deposition of Mr Gugliada. That deposition was taken for the purposes of a civil action against Standard & Poor’s in the United States. It would be fair to say that the only part of the deposition that was not blacked out when first discovered to Clurname was a short passage of Mr Gugliada’s evidence, some 41 lines from over 240 pages of transcript, that was obviously favourable to Standard & Poor’s. An unredacted copy of the deposition which was eventually discovered in mid-2017 included the following passages that had previously been blacked-out:
Q. Throughout your employment at S&P, did you ever observe an instance in which ratings criteria were relaxed in order to maintain market share?
A. I don’t recall the exact year, but I do recall we were losing market share in specific products and we were asked to go back and reevaluate criteria on those specific products.
Q. What specific products are you referring to?
A. Principally mortgages.
Q. Sorry?
A. Principally mortgage-backed securities, it had to be then 2003, 2004.
Q. Who asked you to reevaluate criteria?
A. Not me; Frank Raiter, who was running the group at the time, was asked to reevaluate that.
…
Q. When we broke I was asking you whether, while at S&P, you had ever observed an instance in which ratings criteria were relaxed in order to maintain market share. Do you recall that question?
A. Yes.
Q. You told me that you had, is that right?
A. Not on individual transactions. As I said, ratings criteria was relaxed because of good reasons, any one of three reasons, internal research developing out of additional data, externally provided data that suggested our criteria needed modification, and No. 3, on occasion peer pressure.
Q. What do you mean by peer pressure?
A. Significant decline in market penetration in a specific product.
Q. Who were the peers that put pressure on you to relax criteria?
A. Moody’s and Fitch.
Q. Why did they put pressure on you, what you mean by that?
A. If they changed criteria, relaxing it, what would happen in certain products, not all products, but certain products was issuers would then gravitate towards the rating agency that had the most relaxed criteria and avoid those that had the highest - the most stringent, strictest, criteria.
Q. How did that put pressure on S&P?
A. Up until 2004 area, it didn’t really matter. The vast majority of structured finance securities are issued with triple-A ratings, most investors require both Moody’s and S&P to be on triple-A rated securities, so it really didn’t matter whether we had a little bit higher or a little bit lower criteria, both Moody’s and S&P and quite often Fitch were on every single triple-A rated security, give or take, in the neighbourhood of, you know, mid 90 percent market penetration. Fitch was a bit lower, but they were the new kid on the block. What happened in 2004 was the creation of CDOs backed by mortgage-backed securities, that changed the playing field. Up until 2004, based upon the pricing policies of all the ratings agencies, not just S&P, issuers paid on a percentage of rated securities; since the vast majority of every security is triple-A rated, 90 to 95 percent of the fees are earned by rating the triple-A security. Both Moody’s and S&P were on virtually all of them, so they both had very close market penetrations, it didn’t matter. But the CDOs of mortgage backs, particularly S&P’s policies on mortgage backs, made them less competitive on mortgage-backed securities subordinate tranches, particularly the single A and triple-B rated tranches. S&P in 2004 had very low market penetration, somewhere, if I recall correctly, somewhere in the neighbourhood of 35 percent, whereas Moody’s was significantly higher. That created a big problem for S&P; the big problem was since you require ratings on each instrument that goes into a CDO in order to evaluate its individual credit and then to produce the credit analysis for the CDO itself, you had to have a very strong feel for every security that went into it. S&P, because it had such low market penetration, was not only losing all the CDO of mortgage-backed security business, but we were also starting to lose significantly more of the mortgage-backed business. And so the Department all got together, all the department heads got together, and decided that our mortgage back subordinate rating criteria had to change if we were to maintain market presence in both of those markets.
Q: You mentioned S&P’s policies made them less competitive?
A: Criteria, not policies, criteria.
(Objections omitted)
It is difficult to see how these passages could reasonably have been redacted on the basis of relevance when first discovered. They are plainly relevant to Clurname’s case in relation to the falsity of the S&P Independence Representation. As noted earlier, the issue concerning redactions in discovered documents purportedly based on relevance had been agitated as early as August 2015 in the Swan proceedings. Ms Banton, as solicitor for the applicants in the Swan proceedings, had been pressing for discovery of unredacted versions of the deposition transcripts since that time. It is worth noting that the unredacted transcripts were never discovered in the Swan proceedings because the matter settled before the redaction dispute was resolved. Clurname had also been pressing for discovery of unredacted versions of the transcripts. In his evidence, Mr Grave ultimately effectively accepted, albeit in hindsight, that these passages of the depositions were relevant and should not have been redacted when the depositions were first discovered.
Similarly, Standard & Poor’s initially discovered a heavily redacted deposition of Mr Gugliada taken for the purposes of proceedings commenced against Standard & Poor’s by the State of Connecticut in the United States. When the unredacted transcript was finally produced in June 2017, it contained the following passage that had previously been blacked-out:
Q. So because Moody’s criteria on the synthetic CDOs out of London was less stringent than S&P’s, S&P was losing business on those synthetic CDOs, you weren’t getting the ratings?
A. Correct.
Q. And in order to attempt to recoup that business, S&P attempted to update its default tables for CDO Evaluator, start?
A. We spent two years while I was running that group attempting to find the solution that everybody could be comfortable with, but we never found one during my tenure.
Q. My question was – I think slightly different, which is, the reason – strike the question. Part of the reason you were attempting to update your default tables was in order to win back some of the business on synthetic CDOs out of London because Moody’s had more competitive criteria than S&P; is that true?
A. That’s true. In part, yes. There were other reasons.
Ms Banton was cross-examined at some length concerning her evidence that she did not have a reasonable basis to file a pleading alleging deceit against Standard & Poor’s until August 2017. The general thrust of the cross-examination was that Ms Banton could have discovered the deceit claim in August 2015 because she had by that time seen, in her capacity as solicitor on the record for the applicants in the Swan proceedings, documents discovered by Standard & Poor’s in the Swan proceedings in May 2015, she was aware of allegations made against Standard & Poor’s in proceedings brought in the United States, and she had read and considered the Report of the United States Senate Permanent Subcommittee dated 13 April 2011 which was titled “Wall Street and the Financial Crisis: Anatomy of a Financial Collapse” (US Senate Report).
The submission that Clurname or Ms Banton could have discovered and pleaded the deceit claim against Standard & Poor’s by August 2015on the basis of the discovery in the Swan proceedings, the allegations made in the United States proceedings, and the findings in the US Senate report is rejected. That is so for a number of reasons.
First, a number of the documents that are referred to in the particulars to the proposed deceit claim were not included in the Swan discovery. According to Mr Grave’s slightly more generous analysis, the particulars to the proposed deceit claim refer to some 90 documents. Of those 90 documents, 60 were discovered in the Swan proceedings and 19 were said to be publicly available, at least by the time the proposed pleading was drafted. For what it is worth, Ms Banton said it was actually 75 documents, 71 of which came from the Standard & Poor’s discovery. Ms Banton ultimately asserted that this left 11 documents that were not discovered by Standard & Poor’s until it provided supplementary discovery in June 2017. In any event, Standard & Poor’s did not take the Court to any documents that were included in the Swan discovery that, considered individually or collectively, disclosed, or were capable of disclosing, the alleged deceit. And as discussed later, it did not seek to demonstrate, by reference to the contents of the documents not discovered until June 2017, that Clurname’s proposed claim in deceit could have been properly pleaded or particularised without reference to those documents.
It should in this context be reiterated that the approach that Standard & Poor’s took to the United States proceedings and US Senate Inquiry was beset by inconsistencies and incongruities. On the one hand, Standard & Poor’s put to Ms Banton, and submitted to the Court, that because Ms Banton was aware of the complaints in the United States proceedings and the US Senate Report by August 2015, she was or should have been in a position to file the proposed deceit claim against Standard & Poor’s at that time. On the other hand, Standard & Poor’s appeared to suggest that its knowledge and involvement in the United States proceedings and the US Senate inquiry should for some reason be disregarded when it came to considering whether it would be readily able to respond to the new allegations in time for the trial in March 2018. Unlike Ms Banton, who only had access to publically available information about the United States proceedings, Standard & Poor’s was aware of the evidence and undoubtedly would have conducted its own investigations concerning the allegations.
Second, Standard & Poor’s have already provided extensive discovery not only in this proceeding, but in other similar or related proceedings in Australia, including the Swan proceedings. Mr Grave’s evidence was that a database had been prepared containing all the documents. It is difficult to imagine that, in the course of preparing that database and providing discovery, Standard & Poor’s and its Australian solicitors did not conduct some investigations into the facts underlying the deceit claim, including, for example, the process of developing CDO Evaluator version 3. While it may be accepted that the solicitors may have to revisit the database with the new allegations and issues in mind, that is far from starting from scratch. Equally, the lay evidence already filed by Standard & Poor’s plainly addresses the development of the CDO Evaluator version 3. Plainly investigations were conducted in relation to that issue in the course of preparing that evidence.
In light of these considerations, Mr Grave’s evidence that Standard & Poor’s would effectively be starting from scratch in terms of responding to the new deceit claim is rejected. While he may genuinely hold that belief, it is simply not supported objectively by the surrounding facts and circumstances.
The same can be said for Mr Grave’s evidence that in his opinion or view Standard & Poor’s would not be in a position to adequately respond to the new deceit claims by the March 2018 trial and would accordingly be materially prejudiced. In many respects, that evidence rose no higher than bare assertion or ipse dixit. It was not supported by adequately detailed evidence of exactly why Standard & Poor’s could not adequately prepare for the trial if the amendments are permitted, particularly given that the trial does not commence for a number of months. Some of the matters referred to by Mr Grave in support of his opinion or assertion were themselves expressed in very broad and general terms. To the extent that Mr Grave’s evidence did descend into detail concerning the difficulties that Standard & Poor’s will, or will likely face, that evidence was not ultimately supported by, or was in some respects inconsistent or incompatible with, the objective facts and circumstances to which reference has already been made.
The overall impression one gained from Mr Grave’s evidence was that it tended to exaggerate the difficulty and complexity of the task that he and his client would face in responding to the new allegations. There is some merit in Clurname’s submission that the proposed amended pleading, in substance, raised only one new issue: whether the six named employees knew that the Standard & Poor’s Representations were false. Clurname’s evidentiary case that they did is entirely documentary. The key documents were, relatively speaking, fairly small in number. They filled one lever arch folder. While it may be accepted that Standard & Poor’s investigations are likely to extend beyond those documents and the six named employees, it does not follow that the investigations are particularly difficult or overly complex. That is so particularly given that the investigations are into Standard & Poor’s own documents and own processes and methodology.
Most importantly, Mr Grave’s evidence must be considered in light of the fact that, as has been discussed in detail earlier, in the lengthy period between receiving notice of the proposed amendments and the hearing of the leave application, he did not make any relevant inquiries of Standard & Poor’s United States lawyers to determine what, if any, investigations and work they had carried out in relation to the sorts of issues raised by the amendments. Therefore his observations about, for example, the size or complexity of the task of re-considering the documents and other materials concerning the development of the CDO Evaluator version 3, or the CDO Ratings Quantile Table, must be considered in light of the fact that he was apparently entirely ignorant of whether or not Standard & Poor’s United States lawyers have already conducted detailed investigations and reviews of the evidence concerning those matters. For the reasons given earlier, it is a reasonable inference that the United States lawyers have investigated those matters in the context of, at least, the initial defence and then settlement of the proceedings commenced by the United States Department of Justice.
Equally, Mr Grave’s opinion or view about Standard & Poor’s not being able to respond to the new allegations in time for the March 2018 trial must, insofar as it is based on the question whether or not the relevant six former employees will be willing to assist, must be considered in light of the fact that, in the two month period following Clurname’s filing of the amendment application, he did not attempt to make any inquiries of the six former employees concerning their willingness to assist. In his affidavit, Mr Grave speculates at some length about what might have to be done if the witnesses are not willing to assist, and what would have to be done if they are willing to assist. Had he contacted the employees, or at least inquired of Standard & Poor’s United States lawyers whether they knew about the attitude of employees, he could perhaps have given some probative evidence about what needed to be done. For whatever reason, however, he did not make those inquiries.
There is no doubt that the party who applies for the amendment of a pleading bears the onus of persuading the Court that the amendments should be allowed. That includes, in most cases, persuading the Court that the amendments will not give rise to any prejudice to the opposing party or parties. Where there is a real issue between the parties as to whether the amendments will give rise to any material prejudice, however, that issue must be determined on the evidence. The Court will most likely not be greatly assisted by what, when tested, may amount to little more than a bare assertion of prejudice by the opposing party.
It must be accepted that the proposed amendments, and in particular the amendments that relate to the new cause of action in deceit, will require Standard & Poor’s and its legal team to engage in further work with a view to responding to and meeting the new factual and legal issues. To that extent, at least, it could be said that Standard & Poor’s will suffer some prejudice. As has already been indicated, however, the assertion that in responding to the new issues Standard & Poor’s will be “starting from scratch” is rejected. It is not supported by the evidence and objective circumstances considered as a whole. So too is the assertion or opinion of Mr Grave that Standard & Poor’s will be seriously prejudiced because it will not be able to adequately respond to or defend the new allegations at the trial which is currently listed to commence in March 2018. The evidence considered as a whole does not support that assertion. Likewise, Standard & Poor’s submission that it is inevitable that the March 2018 trial date will be lost if the amendments are allowed is rejected as being unsupported by the evidence considered as a whole.
To the extent that Standard & Poor’s will suffer any prejudice, that prejudice can be, or is likely to be able to be, adequately remedied or alleviated by appropriate case management directions. For example, plainly directions can and should be made which provide Standard & Poor’s with a generous time period – perhaps as much as two to three months – in which to file any additional evidence, lay and expert, in response to the factual issues raised by the amendments. If any specific issues arise, or Standard & Poor’s encounters any specific difficulties in terms of, for example, witness availability, arising from the amendments, no doubt appropriate procedural orders can be made in the course of the trial. Given the likely length of the trial, and Clurname’s case in chief, it is likely that there will be scope for some flexibility, including giving further time to Standard & Poor’s if that is required. Needless to say, consideration can and will also be given at an appropriate time to remedying some of the prejudice suffered by Standard & Poor’s as a result of the amendments by an appropriate costs order.
It should also be noted that Standard & Poor’s appeared to separately or specifically claim that it would be prejudiced by the late amendment of the particulars to paragraph [82.5] of the existing pleading by the insertion of particular (f) to paragraph [82.5], which relates to the CDO Ratings Quantile Table. Even if it is accepted that Clurname could perhaps have included that particular in the pleading at an earlier time, it cannot be accepted that Standard & Poor’s will not be in a position to deal with it in time for the trial. Clurname has filed its expert reports. One of the experts, Mr James Wood, has provided a report which runs to over one hundred pages. He deals with the issue the subject of paragraph (f) in that report. That part of his report is about three pages long. Plainly the issue raised by the new particular is not so complex or difficult that Standard & Poor’s will not be able to respond to it in the five months before the trial commences. Standard & Poor’s has also retained its own experts who no doubt have or will be able to respond to what Mr Wood has said about it. Any contention that Standard & Poor’s has been prejudiced by the insertion of this particular is accordingly rejected.
Two final points should be made concerning Standard & Poor’s contention that it would suffer material prejudice if the amendments were permitted.
First, as discussed earlier in the context of the question whether the new deceit claim arose out of substantially the same facts as the existing claims, most, if not perhaps all, of the documentary evidence referred to in the particulars to the new parts of the pleading would most likely be admissible in support of Clurname’s existing claims. Clurname contended that it would be tendering the new documents whether or not the amendments were permitted. It submitted that the new documents were relevant in a number of ways. In its submission, the new documents tended to prove that senior employees of Standard & Poor’s knew or believed that the S&P Representations were misleading or deceptive. That would be relevant to the question whether the representations were in fact misleading or deceptive. The documents were also said to be relevant to the existing pleaded allegation that Standard & Poor’s ought to have known many of the facts that made the S&P Representations misleading. Finally, Clurname submitted that the new documents are potentially relevant to rebut Standard & Poor’s case, and the lay evidence it intends to lead in support of it, that the assumptions and criteria that were embedded in CDO Evaluator version 3 were objectively determined and were the product of rigorous analytical debate and extensive consideration in testing.
There is considerable merit in Clurname’s submission that the new facts and evidence would most likely be relevant and admissible in relation to the existing claims. It follows that Standard & Poor’s will need to investigate and respond to the new facts and evidence in any event. That is relevant to a consideration of whether the amendments are likely to be productive of material prejudice to Standard & Poor’s.
Second, to the extent that Standard & Poor’s may be prejudiced by the late amendment, some of the blame for that may be apportioned to it. As discussed in detail earlier, Standard & Poor’s discovery was late, defective and deficient. It did not and has not provided a satisfactory explanation for the need for the late “supplementary” discovery which included a number of the documents that, as events transpired, it did not prove could not be considered important for the new deceit claim. It did not and has not provided a satisfactory explanation for the redactions to parts of the depositions, presumably on relevance grounds.
In addition, Standard & Poor’s were provided with the draft amended pleading in mid-August 2017, over seven months prior to the March 2018 trial date. As has already been indicated, the import of Mr Grave’s evidence was that, in the two months between the time that Standard & Poor’s received the draft pleading, and the hearing of the amendment application, Standard & Poor’s Australian solicitors did little in terms of genuinely investigating what they would have to do to respond to the proposed new claims, and what difficulties they might encounter. Rather, they appear to have channelled their resources into mounting a case in opposition to the amendment application. It should be noted that Standard & Poor’s also delayed the hearing of the amendment application, which was initially listed for hearing to commence on 20 September 2017. That listing was vacated on the application of Standard & Poor’s.
Potential prejudice to others
Standard & Poor’s submitted that Clurname would not be prejudiced if leave to amend is refused on discretionary grounds because “there is nothing stopping [it] commencing or seeking to commence new proceedings to advance the deceit claim, if and when they choose”. That submission is rejected. Given the substantial overlap, factual and legal, between the existing causes of action and the proposed deceit claim, the suggestion that Clurname could reasonably be expected to commence a separate proceeding alleging deceit is somewhat fanciful. The fragmentation of Clurname’s case which would arise from that course would plainly be contrary to the overarching purpose of the civil practice and procedure in this Court. The additional costs incurred by Clurname in mounting a separate case against Standard & Poor’s would be substantial and potentially prohibitive.
As far as prejudice to other parties in the related proceedings listed for joint hearing in March 2018, the only submissions filed were by the Respondent, ANZ Bank, in Coffs Harbour City Council v Australia and New Zealand Banking Group Limited, NSD 1021 of 2014. ANZ took no position in respect of the amendment application, save for opposing leave to amend if the result of the granting of leave would be that the trial was vacated. ANZ submitted that it would suffer prejudice in its ability to prosecute its case if the trial was vacated, on the basis that the proceedings concerned events that occurred over 11 years ago. As the trial is not to be vacated as a result of the amendment, it is unnecessary to give any further consideration to this submission.
The parties’ choices
Standard & Poor’s submitted that Clurname could have chosen to take steps to obtain the documents relevant to the deceit claim by various means, including the bringing of an application for a release from the implied undertaking in relation to documents discovered in the Swan proceedings, or bringing an application for preliminary discovery. Those contentions have already been considered in the context of whether the proposed deceit claim could have been advanced at an earlier date. They are rejected for the reasons given earlier.
Other matters raised by Standard & Poor’s
Standard & Poor’s relied on the so-called rule in Weldon v Neal (1887) 56 LJQB 621; (1887) 19 QBD 394. That rule was said to be that an amendment raising a new cause of action (as opposed to an amendment expanding an existing cause of action) which would be statute barred if new proceedings were commenced should not be allowed as a matter of discretion. Putting to one side, for the moment, the question whether that is an accurate statement of the rule, which is somewhat doubtful, there are two short answers to this submission. First, for the detailed reasons given earlier, it cannot be concluded that the proposed cause of action in deceit is statute barred. Thus, there is no scope for the operation of the rule. Second, and in any event, the effect of the rule in Weldon v Neal was largely abolished in this Court by the insertion of s 59(2B) into the FCA Act, and r 8.21(2) which was made pursuant to that section: Australian Securities and Investments Commission v Australian Property Custodian Holdings Ltd (No 2) (2013) 213 FCR 289 at [16]-[19]; McGrath v HNSW Pty Ltd (2014) 219 FCR 489 at [48]-[49]; Voxson at [17]; Clasul at [26]. The application of r 8.21(2) to the proposed amendments was considered earlier.
Balancing the discretionary considerations - conclusion
When all the relevant discretionary considerations are weighed in the balance, the preferable decision is to grant Clurname leave to amend its originating application and pleading. In all the circumstances, the dominant considerations are the importance of allowing Clurname the opportunity to plead the arguable case it now wishes to agitate in relation to deceit and the nature and importance of the proposed amendments. While prejudice to Standard & Poor’s is a potentially very weighty consideration, for the detailed reasons that have been given, the evidence adduced on this application does not support Standard & Poor’s contention that it will suffer serious prejudice such that it would not be able to respond to and defend the new issues raised by the amendments at the trial in March 2018. Such prejudice that Standard & Poor’s has or is likely to suffer as a result of the amendments can and will be adequately dealt with in case management orders and, potentially, appropriate costs orders. Ms Banton adequately explained any relevant delay in applying for the amendment.
Timing of the amendments
Clurname sought an order that the amendments to the pleading “shall be taken to have effect from the date of filing of the Statement of Claim”. The Statement of Claim was filed on 12 August 2015.
A similar order was sought and considered in Gloucester at [234]-[239]. As was noted in that discussion, there appears to be a lacuna in the current Rules on the question of when an amendment made by leave, not as of right, takes effect. Rule 16.54 provides that an amendment made under r 16.51, which deals with amendments that do not require the leave of the Court, takes effect on the date the amendment is made. There is no equivalent rule in respect of amendments made with the leave of the Court under r 16.53. In the former rules (Federal Court Rules 1979 (Cth)), O 13 rr 2 and 3A effectively provided that, other than in the case of amendments that added new claims for relief based in whole or in part on facts or matters that occurred or arose since the commencement of the proceedings, the amendment was to take effect on the date when the pleading was first filed, unless the Court otherwise ordered. Thus, the default position was that an amendment of a pleading by leave that was based on the same, or substantially the same facts as those already pleaded, was to take effect on the date of filing of the original pleading. That was consistent with the position taken in circumstances where there was no express provision in the rules of court dealing with the timing of an amendment: see Baldry v Jackson [1976] 2 NSWLR 415 at 419; Oztech at [61].
On one view, if the default position is that the amendments take effect on the date the original pleading was filed, it is unnecessary to make a specific order concerning the timing of the amendment. On the other hand, given the absence of any express rule in the current Rules concerning the timing of amendments by leave, there is something to be gained by making the order sought by Clurname. It would at least provide some certainty and clarity in relation to the operation of the amendments. In that respect, an order confirming that the amendments take effect on the date of the filing of the original pleading is appropriate in the interests of justice and can be made pursuant to r 1.32 of the Rules.
Standard & Poor’s did not advance any specific reason why the default position should not apply. Nor did it point to any specific considerations which would lead the Court to exercise its discretion to order that the amendments take effect from the date that leave was granted, as opposed to from the time the proceeding was commenced. Having regard to all the facts and circumstances surrounding the amendment application, to which reference has already been made, the preferable course is to order that the amendments take effect from the date that the proceedings were commenced.
Conclusion
Clurname discharged its onus of persuading the Court that it should be granted leave to further amend its originating application and pleading. Orders were made accordingly.
DISPOSITION AND ORDERS
An order granting Clurname leave to file the amended originating application and SFASOC was made at the conclusion of the hearing on 13 October 2017, together with ancillary orders, including an order that the amendments take effect on the date the proceedings were commenced. It was indicated that the question of costs will be determined at a later date.
I certify that the preceding two hundred and seventeen (217) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Wigney. Associate:
Dated: 10 November 2017
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