FEDERAL COURT OF AUSTRALIA

McGraw-Hill Financial, Inc v Clurname Pty Ltd [2017] FCAFC 211

ORDERS

THE COURT ORDERS THAT:

1.    Leave to appeal be granted only in respect of the question of the date from which the amendments to the second further amended originating application and second further amended statement of claim were to take effect as referred to in order 3 of the orders made on 13 October 2017 and challenged in ground 1(g) in the draft notice of appeal.

2.    To the extent set out in ground 1(g) of the draft notice of appeal, the need to file and serve a notice of appeal being dispensed with, the appeal be allowed.

3.    Order 3 of the orders made on 13 October 2017 be set aside.

4.    In lieu of order 3, it be ordered that the date on which the amendments to the second further amended originating application and second further amended statement of claim take effect be determined at trial.

5.    Otherwise, the application for leave to appeal be dismissed on the basis that, in accordance with s 24(1E) of the Federal Court of Australia Act 1976 (Cth), any appeal from the final judgment in this matter may also be founded on the interlocutory judgment, Clurname Pty Ltd v McGraw-Hill Financial, Inc [2017] FCA 1319, and all orders consequential thereon.

6.    Subject to order 7, the applicant for leave to appeal pay 90% of the respondent’s costs of the application for leave to appeal.

7.    Within seven days, both parties have leave to file and serve a written submission not exceeding one page in length proposing any varied costs order the party contends should be made.

Note:    Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011.

REASONS FOR JUDGMENT

THE COURT:

1    After a hearing over four days, in which voluminous affidavits from the solicitors for the parties were read, cross-examination undertaken and a large number of documents tendered, the primary judge decided that the applicant, Clurname Pty Ltd, could amend its originating application and statement of claim to include a cause of action for deceit against the respondents, McGraw-Hill Financial, Inc and related companies. The respondents trade under the business name of Standard and Poor’s or S&P for the purpose of rating financial instruments, including those financial instruments to which this proceeding relates. Clurname had claimed that S&P’s ratings of instruments that Clurname had purchased relying on S&P’s ratings were false, misleading or deceptive in various respects. By the amendments Clurname claimed that S&P knew that its ratings were false, misleading or deceptive. That is a claim in deceit. The primary judge made orders permitting the amendments to add the claims for deceit on the final day of the hearing, 13 October 2017. On 10 November 2017, he gave reasons for judgment of 217 paragraphs explaining why these orders were made (Clurname Pty Limited v McGraw-Hill Financial, Inc [2017] FCA 1319). S&P now seeks leave to appeal against the orders the primary judge made permitting the amendments.

2    Despite the hearing over four days, the voluminous affidavits, and the large number of documents by which the primary judge was burdened, S&P omitted to expose one crucial matter to his Honour. The matter to which his Honour’s attention was not drawn was that if he made an order that the amendments take effect from the date of commencement of the proceedings on 12 August 2015, instead of the amendments taking effect from the date the amendments were permitted on 13 October 2017, then S&P would or might be precluded from contending at the final hearing that the alleged deceit was discoverable by reasonable diligence in the period from 12 August 2009 to 13 October 2011, with the consequence that the deceit claim would be statute barred. Instead, the primary judge was left to observe at [215] that, as no specific reason why the default position that amendments should take effect from the date of filing of the original pleading had been advanced, the amendments should take effect from that date, 12 August 2015. As a consequence, the primary judge not only permitted the amendments but also made order 3 in these terms:

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.

3    Order 3 is subject to proposed appeal ground 1(g) which is as follows:

in the event that the amendments were allowable, the primary judge erred in ordering that the amendments take effect from the date that the proceedings were commenced.

4    It is only now, in this application for leave to appeal, that S&P has identified what should have been disclosed to his Honour. In short, if all of S&P’s arguments to the contrary are ultimately rejected, then it would wish to argue nevertheless that the cause of action for deceit is statute barred because the alleged deceit was discoverable with reasonable diligence between 12 August 2009 and 13 October 2011.

5    By s 55(1) of the Limitation Act 1969 (NSW), for causes of action based on fraud or deceit, “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 … the cause of action first discovers, or may with reasonable diligence discover, the fraud deceit or concealment … does not count in the reckoning of the limitation period …”. The limitation period for the tort of deceit is six years from the date on which the cause of action first accrued (s 14 of the Limitation Act). The competing arguments for accrual of the cause of action and thus the limitation period commencing to run range from 2006 (the date of the issue of the instruments rated by S&P) to 2009 (the date it first became apparent that losses would be suffered by those who had purchased the instruments). Other periods may emerge during the final hearing, depending on the facts. If, as order 3 involves, the amendments take effect from 12 August 2015, discoverability of the alleged deceit between 12 August 2009 and 13 October 2011 will be immaterial; the proceedings will have been commenced within time. If, however, the amendments take effect from 13 October 2017 then discoverability of the alleged deceit with reasonable diligence before 13 October 2011 would be a relevant issue for the trial. This is not mere conjecture. One argument which S&P may wish to make in support of a contention that the alleged deceit could have been discovered with reasonable diligence in 2011 is the publication of the Report of the United States Senate Permanent Subcommittee dated 13 April 2011, “Wall Street and the Financial Crisis: Anatomy of a Financial Collapse”. Whether or not this argument has any merit is immaterial. It is that order 3 precludes the argument from being made. It is the 2011 report which S&P might wish to say should have alerted purchasers such as Clurname that there was or may have been a fraud or deceit case against S&P concerning its ratings of instruments such as those the subject of this proceeding. Putting the matter this way perhaps explains why this submission was not at the forefront of the submissions of S&P before the primary judge.

6    In the course of the hearing of the application for leave to appeal, Clurname accepted that the status of the judgment as interlocutory only and the full reservation of rights of appeal from a final judgment including any interlocutory judgment on which the final judgment is based by s 24(1E) of the Federal Court of Australia Act 1976 (Cth) (the Court Act), does not ameliorate this potential substantial injustice to S&P. While it might be said the injustice is of S&P’s own making, it may be inferred from the primary judge’s reasons at [212]-[216] that the effect of order 3 on the trial identified above was not considered. The primary judge recognised the principle that, as limitation questions usually involve complex questions of fact and law, it is generally not appropriate for them to be determined at an interlocutory stage (at [108]; see Wardley Australia Limited v State of Western Australia [1992] HCA 55; 175 CLR 514 at 533). His Honour was careful to characterise the contention that the proposed deceit claim was not statute barred as “reasonably arguable”. When his Honour came to consider the matter on the hypothesis, which he did not accept, that r 8.21(1)(g)(i) of the Federal Court Rules 2011 (Cth) applied (discussed below), he did say at [120] that “the evidence adduced on this application establishes, for the purposes of s 55(1)(a) of the Limitation Act, that the action in deceit was not discovered, and was not discoverable with reasonable diligence, by Clurname or its solicitor more than six years prior to the date that the proceeding was commenced, or the application for the amendment was made”. This apparently definitive finding, however, must be understood in the overall context of his reasons. The immediately preceding sentence in [120] says this:

If, on the other hand, that construction of r 8.21 is wrong, and it is necessary to determine for the purposes of this application whether the proposed new deceit action is statute barred, for the reasons already given it cannot be concluded on the evidence before the Court on this application that the action is statute barred.

7    And, as noted, at [110] the primary judge said:

It is at the very least reasonably arguable that the proposed deceit claim is not statute barred by reason of the operation of s 55(1)(a) of the Limitation Act. It is at least reasonably arguable that Clurname, through its solicitor or otherwise, did not discover the alleged claim in deceit against Standard & Poor’s until August 2017, as Ms Banton claimed in her evidence. Standard & Poor’s submission that Ms Banton’s evidence in that respect should be disbelieved or not accepted has no merit and is rejected for the reasons already given. Equally, it is at least reasonably arguable that Ms Banton could not, with reasonable diligence, have discovered the deceit claim before that time, or at least before early to mid-2017 when Standard & Poor’s provided supplementary discovery and produced unredacted versions of documents previously discovered, including the depositions. Standard & Poor’s submission that the Court should find that Ms Banton could, with reasonable diligence, have discovered the deceit claim in August 2015, when these proceedings were commenced, is rejected.

8    When the judgment is read as a whole it is apparent that the primary judge was not making a definitive finding at [120] that the alleged claim in deceit was not reasonably discoverable until August 2017 for all purposes, or even for the purposes of the interlocutory application; for his Honour, the interlocutory application turned not on r 8.21(1)(g), but the conclusion that it was reasonably arguable that the deceit claims were not statute barred (see at [139]). It follows that the issue under s 55 of the Limitation Act remains one for evidence and submission at the trial, including further evidence from and cross-examination of Ms Banton.

9    These considerations support the conclusion that order 3 was made without appreciating the effect it could have on the trial, supposing all of S&P’s other arguments about the limitation period to be wrong. This is sufficient to found a conclusion of error by reason of oversight. The risk is that the trial may miscarry to this extent because evidence going to the issue of discoverability of the deceit before 13 October 2011 would be irrelevant. For this reason, Clurname consented to an order setting aside order 3, albeit on the basis that its consent was conditional on leave to appeal otherwise being dismissed. The mere consent of the parties is not a basis to allow an appeal (Bradken Ltd v Norcast S.ar.L [2013] FCAFC 123; 219 FCR 101). There was error here in the overlooking of prejudice resulting from the order, albeit explained by the lack of assistance from the parties.

10    Leave to appeal should otherwise be dismissed.

11    First, the test for a grant of leave to appeal an interlocutory judgment, of sufficient doubt about the correctness of the decision and substantial injustice supposing that decision to be wrong, is to be applied against the terms of s 24(1E) of the Court Act which provides that:

The fact that there has been, or can be, no appeal from an interlocutory judgment of the Court in a proceeding does not prevent:

(a)    a party from founding an appeal from a final judgment in the proceeding on the interlocutory judgment; or

(b)    the Court from taking account of the interlocutory judgment in determining an appeal from a final judgment in the proceeding.

12    If the position of a party is protected by the final right of appeal, then it is difficult to conclude that there is substantial injustice which results from an order permitting the amendment of a pleading, even one which adds a new cause of action as in the present case. For this reason, no doubt, S&P confined its application for leave to appeal to proposed appeal ground 1 relating to the limitation period, and submitted that proposed grounds 2 to 7 could be deferred. This involves an implicit acceptance of the lack of any substantial injustice to which these grounds give rise, supposing the primary judge’s orders to be wrong. The application for leave to appeal having been filed relating to all proposed grounds, deferral is inappropriate; to the extent it relates to proposed grounds 2 to 7 the application for leave to appeal should be dismissed because there can be no substantial injustice by requiring S&P to deal with all appeal issues together arising from a final judgment, should it choose to do so.

13    Second, S&P’s arguments in support of the existence of substantial injustice relating to proposed grounds 1(a) to (f) are not persuasive. Those proposed grounds are:

1    The primary judge erred in addressing the issues relating to limitation periods because:

(a)    the primary judge erred in finding that the deceit claim arises out of substantially the same facts as those already pleaded to support the existing claims;

(b)    the primary judge acted upon a wrong principle by addressing the question whether the Respondents had shown that the Respondents had a reasonably arguable case that the deceit claim was not statute barred rather than whether the Respondents had shown that the Appellants (S&P) did not have a reasonably arguable case on limitation which will be prejudiced by allowing the amendments;

(c)    the primary judge acted upon a wrong principle and erred in finding that rule 8.21(1)(g)(i) and (2) of the Federal Court Rules 2011 (Cth) were not engaged because it could not be concluded that the deceit claim was statute barred;

(d)    the primary judge erred in failing to find that the Appellants had a reasonably arguable case on limitation which would be prejudiced by allowing the amendments;

(e)    the primary judge erred in failing to refuse the amendments based on the rule in Weldon v Neal or related considerations;

(f)    the primary judge erred in finding that the Court had power to make the Orders;

14    Leaving aside order 3, S&P’s arguments about substantial injustice were ultimately confined to the fact of having to deal with the deceit claim, the forensic choices and potential problems with which it would now be confronted having already filed its evidence without having considered the deceit claim, an overall tilting of the balance in the litigation against S&P by the presence of the deceit claim, and the reputational injury by reason of the deceit claim being present and the subject of hearing. None of these matters, said S&P, would be wholly ameliorated by the right of appeal, supposing the primary judge’s decision to be wrong.

15    Such injustice as these matters might represent cannot be characterised as substantial in the circumstances.

16    For one thing, as the primary judge observed at [20]-[27], one reason S&P is dealing with the deceit claim now and faced with forensic choices in this regard is that it failed to discover documents as and when required in respect of the existing causes of action. Rather, S&P unilaterally redacted documents on grounds other than legal professional privilege and otherwise discovered additional documents by way of “supplementary discovery” some three months after the due date. Amongst these documents are those which found the claims for deceit. The assessment of the substantiality of any injustice is not to be carried out in a vacuum, without regard to the surrounding circumstances or the responsibility of the party alleging injustice for the position in which it finds itself.

17    For another thing, as the primary judge also found at [134] the documents on which Clurname relies to found the claims for deceit are also relevant to the existing causes of action that S&P’s ratings of the financial instruments (synthetic collateralised debt obligations or SCDOs as explained by the primary judge at [5]-[14]) were false or misleading or deceptive in contravention of provisions of the Corporations Act 2001 (Cth) and the Australian Securities and Investments Commission Act 2001 (Cth). While, as S&P pointed out, the particulars to the existing claims have not been amended, it can hardly be doubted that the facts on which the new cause of action for deceit depends, are other than relevant to the existing causes of action. S&P will thus have to deal with the consequences of those documents in any event.

18    Another important matter should be noted, albeit not one relied upon by the primary judge. While Clurname never previously alleged that S&P knew that its ratings of the SCDOs were false or misleading or deceptive, S&P chose to plead in defence that it “did not intend to cause or fraudulently cause the loss or damage suffered by the Applicants” (para 133(f) of the second amended defence) and “acted honestly” in assigning the impugned ratings (para 134(b) of the defence). S&P did so for the purpose of availing itself of the provisions of ss 1041I and 1317S of the Corporations Act. Section 1041I(1B) permits damages to be reduced if, amongst other things:

…

(c)    the defendant:

(i)    did not intend to cause the loss or damage; and

(ii)    did not fraudulently cause the loss or damage;

…

19    Section 1317S(2)(b)(i) permits a court to relieve a person in whole or part from liability for contravention of a civil penalty provision if it appears to the court, relevantly, that the person has “acted honestly”. It can be accepted that honesty here is to be viewed from the perspective of the interests of S&P. But that would include not being deceitful to those who rely on S&P’s professional work.

20    In other words, by its own defence S&P itself placed in issue its state of knowledge and intentions. The belatedly discovered documents are thus not only relevant to Clurname’s existing claims as the primary judge held, but also S&P’s existing defence. In these circumstances whatever consequence for S&P might now be involved in permitting Clurname to raise the same or similar issues about S&P’s knowledge and intentions, be it forensic, reputational, or otherwise, barely warrants the name injustice at all, let alone substantial injustice.

21    Third, no matter how apparently enticing, questions of principle are not a sufficient reason to grant leave to appeal against an interlocutory decision, thereby bifurcating the appellate process. One issue of principle which does arise in this case can be addressed by confirming that the approach of the primary judge is not attended by sufficient doubt to warrant appellate reconsideration. The primary judge rejected S&P’s argument that the exclusive power to permit the amendment was to be found in r 8.21(1)(g) of the Federal Court Rules because, as he put it at [119]:

Those rules would only appear to apply where it has clearly been established that the application to amend to add a new claim for relief “is made after the end of any relevant period of limitation applying at the date the proceeding was started”. It is difficult to see how those rules could relevantly be engaged if there is merely a doubt or question about whether the proposed new action is statute barred.

22    Rule 8.21 of the Federal Court Rules is in these terms:

(1)    An applicant may apply to the Court for leave to amend an originating application for any reason, including:

(a)    to correct a defect or error that would otherwise prevent the Court from determining the real questions raised by the proceeding; or

(b)    to avoid the multiplicity of proceedings; or

(c)    to correct a mistake in the name of a party to the proceeding; or

(d)    to correct the identity of a party to the proceeding; or

(e)    to change the capacity in which the party is suing in the proceeding, if the changed capacity is one that the party had when the proceeding started, or has acquired since that time; or

(f)    to substitute a person for a party to the proceeding; or

(g)    to add or substitute a new claim for relief, or a new foundation in law for a claim for relief, that arises:

(i)    out of the same facts or substantially the same facts as those already pleaded to support an existing claim for relief by the applicant; or

(ii)    in whole or in part, out of facts or matters that have occurred or arisen since the start of the proceeding.

(2)    An applicant may apply to the Court for leave to amend an originating application in accordance with paragraph (1)(c), (d), (e) or subparagraph (g)(i) even if the application is made after the end of any relevant period of limitation applying at the date the proceeding was started.

(3)    However, an applicant must not apply to amend an originating application in accordance with subparagraph (1)(g)(ii) after the time within which any statute that limits the time within which a proceeding may be started has expired.

23    The primary judge also expressed doubt about the correctness of Voxson Pty Ltd v Telstra Corporation Ltd (No 7) [2017] FCA 267; 343 ALR 681 at 686 [21] in which it was said that “the Court has the power to grant leave to amend both an originating process and a pleading to add a statute-barred cause of action but only in the circumstances referred to in r 8.21(2) of the FCR”. The primary judge noted that Clurname had not submitted that Voxson was wrong to this extent, let alone plainly wrong, and thus proceeded assuming it to be correct, as he was required to do. We are not subject to the same constraints as the primary judge. We do not consider that Voxson is correct in this respect. The language of r 8.21(1) is clear: an applicant may apply to the Court for leave to amend an originating application for any reason “including” any of the reasons in r 8.21(1)(a)-(g). Subrules (a) to (g) are examples of amendments that may be the subject of application. They are not a code. Thus, the interaction of r 8.21(1)(g) and (2) does not mean that the Court’s power to permit an amendment asserted to involve a statute-barred claim is confined to the circumstances in r 8.21(1)(g)(i). We leave to one side for further argument the proper approach to an amendment introducing an unarguably statute-barred claim. Nevertheless, the following considerations undermine any rigid or bright-line approach exclusively based on r 8.21(1)(g) and r 8.21(2).

24    The Federal Court Rules must also be construed as a whole. Apart from the fact that the power to apply to amend is expressed inclusively in the opening words of r 8.21(1), other rules disclose the true position. Thus, the rules include

R 1.32

The Court may make any order that the Court considers appropriate in the interests of justice.

R 1.33

The Court may make an order subject to any conditions the Court considers appropriate.

R 1.34

The Court may dispense with compliance with any of these Rules, either before or after the occasion for compliance arises.

R 1.35

The Court may make an order that is inconsistent with these Rules and in that event the order will prevail.

R 16.51

(1)    A party may amend a pleading once, at any time before the pleadings close, without the leave of the Court.

(2)    However, a party may not amend a pleading if the pleading has previously been amended in accordance with the leave of the Court.

(3)    A party may further amend a pleading at any time before the pleadings close if each other party consents to the amendment.

(4)    An amendment may be made to plead a fact or matter that has occurred or arisen since the proceeding started.

25    Rules 1.32 to 1.35 are important weapons in the Court’s armoury to enable the overarching purpose of the “civil practice and procedure provisions” (defined in s 37M(4) of the Court Act to comprise the Rules and “any other provision made by or under this Act or any other Act with respect to the practice and procedure of the Court”) to be achieved as identified in s 37M(1) of the Court Act. The overarching purpose is to facilitate the just resolution of disputes according to law, as quickly, inexpensively and efficiently as possible. Faced with these provisions to construe r 8.21(1)(g) as an exclusive power to permit a statute-barred amendment let alone a merely arguably statute-barred amendment (as in the present case) only in the circumstances permitted by r 8.21(2), is inconsistent with the language of the Rules and inimical to the overarching purpose in s 37M of the Court Act. As the present case demonstrates, given the competing arguments about when the cause of action first accrued and the potential operation of s 55(1) of the Limitation Act, if there is a reasonable argument the claim is not statute-barred, there is no reason in principle that an amendment should not be permitted, particularly if all rights are preserved by the date on which the amendment takes effect being determined as part of the final judgment rather than on an interlocutory basis.

26    To the extent it has any remaining operation in this Court, the rule in Weldon v Neal (1887) 19 QBD 394 at 395 to the effect that a party is not permitted to amend a pleading to add a cause of action which is statute-barred, depends on the new claim being statute-barred. As Wardley at 533-534 makes plain, that matter should not ordinarily be determined at an interlocutory stage.

27    The cases on which S&P relied to establish the proposition that the amendment must be rejected if the defendant has a “reasonably arguable case on limitation” (Chandra v Brooke North (A Firm) [2013] EWCA Civ 1559 at [67], citing Welsh Development Agency v Redpath Dorman Long Ltd [1994] 1 WLR 1409 at 1425H, which has been applied in Ballinger v Mercer Ltd [2014] EWCA Civ 996; 1 WLR 3597 and Otuo v Brierely [2015] EWCA Civ 1143, amongst others) are decisions of courts of the United Kingdom in a different statutory context. By s 35(1)(b) of the Limitation Act 1980 (UK) any new claim made in the course of any action is deemed to be a separate action and to have been commenced on the same date as the original action. There is no discretion for a court to fix a later date on which the amendment is deemed to take effect. Further, the rules of court in the United Kingdom expressly provide that an amendment introducing a statute-barred claim may only be permitted if the new claim arises from the same or substantially the same facts as the existing claim. In this context, the principle that the amendment must be rejected if the defendant has a “reasonably arguable case on limitation” may be cogent; but it says nothing about the different context which applies in this Court. We do not see any error in the primary judge not applying the strict and mechanical rule or approach in Chandra and the other United Kingdom cases.

28    The primary judge thus made no error at [139] in saying that:

Finally, on this topic, Standard & Poor’s relied on the statement of Millett LJ in Paragon, (at 404) referring to Welsh Development Agency, that “leave to amend by adding a new cause of action should not be given unless the plaintiff can show that the defendant does not have a reasonably arguable case on limitation which will be prejudiced by the new claim or that the new cause of action arises out of the same or substantially the same facts as a cause of action in respect of which he has already claimed relief”. Three points can be made about that statement and Standard & Poor’s reliance on it. First, its applicability in this Court must be considered in light of r 8.21 of the Rules. Second, for the reasons already given, Clurname has demonstrated that the new deceit claim arises out of substantially the same facts as the existing claims. And third, again for the reasons already given, Clurname has shown that it has at the very least a reasonably arguable case that the proposed deceit claim is not statute barred.

29    To the extent S&P challenged the primary judge’s second proposition, that the new deceit claim arises out of substantially the same facts as the existing claims, the point is moot. As the primary judge correctly recognised, the power to permit the amendment did not depend on satisfying r 8.21(1)(g)(i) or (2) because it is not necessarily the case that the new claim is statute barred and, as we have said, r 8.21(1)(g)(i) and (2) are not exclusive sources of power to amend. As to the second proposition, we would note only that in the face of S&P’s defence that it “acted honestly” and “did not fraudulently cause the loss or damage”, it is a long bow to draw any analogy with the UK cases such as Paragon Finance plc v DB Thakerar & Co [1999] 1 All ER 400, Ballinger, Chandra, Blue Tropic Limited v Chkhartishvili [2016] EWCA Civ 1259 (or Althaus v Australia Meat Holdings Pty Ltd [2006] QCA 412; [2007] 1 Qd R 493 which applied Paragon). In Paragon at 418 this was said in deciding the new claim did not arise from substantially the same facts:

In all our jurisprudence there is no sharper dividing line than that which separates cases of fraud and dishonesty from cases of negligence and incompetence.

30    In the present case, however, S&P, by its defence, moved the dividing line to ensure that the existing case included as facts in issue S&P’s knowledge, state of mind and intent. While S&P did so to obtain the advantage of provisions ameliorating liability for damages in cases where there was no fraud and the impugned conduct was honest, its complaints that Clurname now wishes to prove the opposite ring hollow.

31    Given that the only error we have found was a result of inadvertence resulting from the fact that S&P failed to make any submission about the date on which the amendments should take effect, but that it took until the hearing of the leave application for Clurname to concede this point, we consider that S&P should pay 90% of Clurname’s costs of the application for leave which otherwise is to be dismissed.

Associate:

Dated:    15 December 2017