In the business of debt and securities rating, the reliability of the agency rating is all important. Of the numerous rating agencies which exist,(1) only a hallowed few have a reputation for virtually unabridged reliability. But even these agencies make mistakes.(2) The largest of these have begun to branch out into the international financial markets as the companies they rate explore an increasingly global economy. Coupled with the international expansion of rating agencies and a growing potential for mistakes in foreign venues come disparate classes of liability in different jurisdictions.
The globalization of national economies and the resulting development of international financial rating services is, in part, brought about by ever-increasing economic and political activity within the recently completed European Economic Area and border-free European Community,(3) as well as boom economies in the so-called "little dragons" of east Asia. In contributing to the discussion of economic globalization, we address the legal relationships between and the accountability of corporate raters to those rated and those who rely upon ratings and other kinds of rating agency communication. We take as our focus in this Article certain European Community jurisdictions and the United States not simply because they may be the venues for rating contracts and the sites where debt and securities rating liabilities will be determined, but further because the legal systems on both sides of the Atlantic will play a major role in influencing rating contracts and future liabilities of raters in Europe, America, and the world.(4)
In establishing what the liabilities of rating agencies are and where those liabilities might expand, we look primarily at the duty of care of debt raters in England and the United States in two settings. First, we deal with a rating agency's duty of care to use reasonable skill where there is no contract with the injured party. Secondly, we look at possible defamation liability and defenses of rating agencies who falsely underrate the creditworthiness or securities offering of a company. In addition, we touch upon government influence over rating agencies in France and rating agency liability generally in Germany.(5)
A. The Business of Rating
Rating agencies are, simply put, predictors of a company's or even a government's ability to meet the financial obligations of its debt and its bond issues as they accrue. An agency's rating performs, according to one rater's definition, the isolated task of "credit risk evaluation."(6) In reality, the effect and influence of both the rater and its rating go far beyond this modest suggestion.
Rating agencies rate everything from corporate public utilities and multinational corporations to municipal issuers and national governments as well as both foreign and English companies. Raters seek to remain independent from these issuers by refraining from direct investment in the companies they rate. The securities issuers sell bonds with varying degrees of security pledges and seniority and issue debt that is insured, structured, or otherwise complex. In the words of one rater, the rating of these varied types of debt and debt instruments provides "a single scale to compare among this array of different debt instruments."(7)
In the case of American and British raters, rating agencies operate with no governmental mandate, subpoena powers or official authority. In France, the situation is somewhat different.(8) Raters consider themselves, at least in the case of the large American agencies, to be members of the media and thereby shielded from the usual liabilities, such as libel, by the substantial protections of the First Amendment.(9)
Ratings, or credit risk evaluations, appear most often in the form of letter and/or number symbols.(10) From the rating agency perspective, a rating should be only one in a number of factors in the formation of an investment decision. Raters themselves decry the notion that a rating is a recommendation to hold, sell, or purchase a particular security by pointing out that ratings do not take into account other elements of an investor's decision process such as market price and the investor's risk preference, and therewith seek to shelter themselves from the liability of the investment advisor.(11) This view does not preclude the extension of some type of duty of care liability in light of the contractual and practical realities of rating. A case in point is the circumstance of the institutional or large investor who contracts with a rater for ratings of specific securities.
By way of admission, raters themselves agree their influence in the securities and finance fields is pervasive to the point that issuers regularly "structure financing transactions to reflect [the rater's] credit criteria so they qualify for higher ratings,"(12) and, further, companies regularly seek the rater's "guidance on credit quality issues that might affect [the rater's] opinion of corporate creditworthiness."(13) Occasionally, companies that face a downgrade in their rating opt to take significant measures recommended by a rating agency to preserve their rating with that agency.(14) Many companies go even further by incorporating specific rating objectives as corporate goals.(15) As even the rating agencies will admit, seeking a specific rating can be inconsistent with the long-term goals and stability of an institution. The point that companies will go to great lengths to secure the favor of rating agencies reinforces, however, the widely-held notion that ratings actually reflect the value or creditworthiness of the institution and its securities, which is in reality quite accurate. A low or lowered rating on creditworthiness will increase a company's interest on loans. A low or lowered securities rating can cost the issuer points at the stock market.
Whether it is a rating on debt or securities or a course to improve or hold one's rating which raters are communicating, rating agencies take pains to add that they are not recommending any course of action to anyone and that the companies, issuers and investors who use their information do so at their own risk without a resulting duty of care on the part of the rater. On the one hand, the raters must acknowledge their substantial influence in the corporate financial decision process, and on the other they would obviously like to avoid responsibility when a corporation, institution or investor acts upon a rater's advice to its detriment.
The consumer of the information is in a Catch-22 if the raters are right. Failing to preserve or improve a rating will most certainly cost a corporation money. However, employing the potentially bad advice of an agency in order to hold or improve a rating may also cost a corporation money. Furthermore, if the raters have their way and there is no duty owed the company that relied on the advice, a company may not merely lose money from reliance upon bad advice, but could also then lose its rating, and thus, even more money, without any recourse against the rater who provided the advice.
In light of the realities of the relationships between the rater and the community that consumes the ratings and other rating agency financial advice, arguably some form of duty should be owed those parties who depend upon a rater's recommendation, whether it be in the form of a letter or number symbol or direct advice on financial structuring.
B. Rating Agencies in France
As mentioned above, the complexion of the relationship between government and rating agency is somewhat more enigmatic in France than in England or the United States. Following an enactment of July 26, 1991, issuers of certain securities are obligated to obtain a rating before they may issue their securities.(16) Other issuers must fulfill the information disclosure requirements of article 6 of the Decree of February 13, 1992, similar to the United States' SEC disclosure requirements.(17) Article 3 of the decree requires those issuers who must receive ratings on their securities to obtain them only from those rating agencies approved by the French Finance Minister before they may issue the securities.(18) Furthermore, issuers not required to obtain a rating may nonetheless significantly lessen their disclosure requirements by receiving such a rating from one of the approved rating agencies.(19) For all intents and purposes, therefore, only those rating agencies that are approved by the French Finance Minister may do business in France.
A commission made up of representatives of the Finance Ministry, the Budget Commission, the Committee on Banking Regulation, the French Stock Exchange and the Bank of France sends representatives to each approved agency to oversee the operations there.(20) These representatives, in turn, make reports to the commission and carry suggestions from the commission to the rating agencies. The influence exerted upon the agencies by the commission cannot be understated in light of the fact that tenure on the approved list lasts one year, at which time the Finance Minister reassesses the approval of each agency for the next year. The present list, which expired on December 31, 1992, consists of only three agencies: Euronotation France, which just recently merged with IBCA; Moody's France S.A. and Moody's Investors Service; and Standard & Poor's, Agence d'Evaluation Financiere, and Standard & Poor's Corporation.(21)
C. Rating Agency Liability in Germany
For the purposes of comparison, the liability of debt raters in Germany is developed to a greater degree than it is in England or the United States as there are decisions in cases from which one can draw dependable inferences to rater liability.(22) Generally, in Germany a rating agency is not liable to rated corporations or investors unless there is a contract (positiver Vertragsverletzung).(23) For the corporation injured by a false rating, its right of action lies also in its contract with the rating agency. The agency could be liable to the corporation for the higher interest which the corporation would be forced to pay on loans.(24) For an investor, a subscription agreement to a magazine published by the rating agency between the investor and the agency is sufficient privity of contract under German law for an investor to bring suit for a falsely high rating upon which the investor relied to make a securities or commercial paper purchase.(25) The rater can be held liable for the investor's lost capital. In the absence of a subscription agreement or other contract, courts may imply a contract as between investor and rater where there is a contract between the rater and the corporation whose securities the investor purchased and where the rating was falsely high.(26)
II. RATING AGENCY DUTY OF CARE
English courts have yet to handle directly a case of rating agency liability. Additionally, Parliament has yet to act on the issue. Bearing in mind that predicting the future is an inexact science, we endeavor to estimate how the courts would fashion rating agency liability to those entities they rate and to those who rely to their detriment upon their advice. Though there are, as we have said, no cases dealing directly with rating agency liability, there are some clues sprinkled through the many decisions handed down on duty of care. We venture to construct what the duty of an international rater might be through analogy to the duties of care of several other professions as enunciated in the decisions. The first of these is the duty of care of a surveyor of real property to the property purchaser.(27) The next is the duty of care of ship classification societies to the purchaser of the classified ship.(28) Another, which is somewhat similar to at least one type of work which raters perform, is the duty of care of a valuer of securities to a shareholder.(29) Last is the duty of care of a company auditor to both actual and potential shareholders.(30)
Although there are no decisions directly considering a duty of care for rating agencies in England, there are two American cases that have dealt with the issue.(31) After first discussing the status of a duty of care for rating agencies in England, we turn to the decisions in the United States and examine the possibilities for decisions contrary to those already decided.
A. Duty of Care in England
It should be stated at the outset that if there is a contract between a rater and a company or an investor, there is no question, barring a relevant and valid exemption of liability clause, that an agency owes a duty to use reasonable skill in the execution of its obligations under the contract to the party with which it maintains the agreement.(32) The same duty of care to use reasonable skill also applies in particular non-contractual circumstances as it does in situations with contract. However, finding the duty of care in those situations without the benefit of a contract is much more difficult to establish, since the relationship is not as readily definable.
Before addressing the aforementioned instances, we turn to the decision establishing the modern view of the duty of care in cases where there is no contract: Hedley Byrne & Co. v. Heller & Partners.(33) In Hedley Byrne an advertising company, before placing substantial advertising orders through a particular company, asked the banker of the company for a report on its financial standing. The bank gave favorable references. Relying upon the bank's favorable references, the advertiser placed the orders, which were subsequently lost due to that company's insolvency.(34) The court held that a negligent, though honest, misrepresentation, spoken or written, may give rise to an action for damages for financial loss, apart from any contract or fiduciary relationship, because the law will imply a duty of care when a party seeking information from a party possessed of a special skill trusts him to exercise due care, or when that party knew or ought to have known reliance was being placed on his skill and judgment.(35) Important to the decision was the fact that the bank would easily avoid liability since it had disclaimed responsibility for the accuracy of the reference.(36) On the question of proximity, the court held there must be a voluntary assumption of direct responsibility on the part of defendant, which in turn gives rise to a special relationship between the defendant and the plaintiff who has suffered loss.(37)
Since Hedley Byrne, many courts have attempted to fashion a rule by which one may determine when and where a duty of care attains. Before proceeding to suggest yet another method, it is appropriate to recall the words of Lord Stewart, who wrote in reference to determining where and when a duty of care exists:
It is not easy, or perhaps possible, to find a single proposition
encapsulating a comprehensive rule to determine when persons
are brought into a relationship which creates a duty of care upon
those who make statements toward those who may act upon them
and when persons are not brought into such a relationship.(38)
Keeping this testimony in mind, we believe--and recent decisions seem to corroborate(39)--that there are three basic requirements that must be satisfied before liability for pecuniary loss resulting from a negligent statement may be imposed: first, the reliance upon the defendant's statement must be reasonably foreseeable; second, there must be sufficient proximity between plaintiff and defendant; and third, it must be just and reasonable under the circumstances to impose a duty of care on the defendant.
The first of these, reasonable foreseeability of reliance, although necessary, is insufficient to impose a duty of care.(40) Next is the more complex requirement of proximity, defined broadly as "such close and direct relations that the act complained of directly affects a person whom the person alleged to be bound to take care would know would be directly affected by his careless act."(41) Regardless of how defined, proximity can be elusive. Some decisions point to a "special relationship" in finding it.(42) Others look for a relationship just short of a direct contractual relationship.(43) Still others say where proximity exists there is a "voluntary assumption of responsibility."(44) Finally, one recent case argues the focus of the proximity component combines all three of the above and is, therefore, nothing more than an examination of the closeness and directness of the relationship between the parties in which the element of foreseeability also plays an important role.(45)
The final requirement that must be met before a duty of care is owed is whether the imposition of such a duty is reasonable and just, given the circumstances.(46) Important factors in determining the fairness of the imposition of a duty are whether the defendant voluntarily exercised a professional skill for compensation, whether there is another means of redress for the plaintiff, whether the duty contended for naturally arises from a duty that already exists or its imposition serves the interest of public policy or some socially desirable objective.(47)
In the four instances discussed below, a duty of care was claimed despite there being no contract. These illustrations are somewhat (but not entirely) similar to rating agencies. They shed light on the corresponding relationships necessary to give rise to the duty. With the discussion of the following cases as a framework, we then turn to an analysis of the circumstances in which a rating agency owes a duty of care to shareholders and companies.
1. Surveyor of Property
When a prospective purchaser of real property approaches a mortgagee for financial assistance in making a purchase of property, normally a mortgagee orders a survey of the property to estimate its value and to discover any faults that may affect its value and its fitness for sale. Its reasons for doing so are not an altruistic desire to insure the future enjoyment of the purchaser, but to protect its investment in the purchase price in the event of a default and foreclosure and eventual resale of the property by the mortgagee.
In assessing the liability of a surveyor to both mortgagee and mortgagor, it was held in Smith v. Bush(48) that where a surveyor of property has performed a survey for a mortgagee and the purchaser, that is the mortgagor, is likely to rely upon the survey, the surveyor is liable to the purchaser even where there was: (1) a disclaimer for liability in a contract between surveyor and mortgagee; (2) no contract between surveyor and purchaser; and (3) the purchaser was not even aware a survey had been performed.(49)
Smith v. Bush involved two prospective purchasers of property who applied to different mortgagees for purchase money. In both situations the surveyors negligently evaluated the property. In one, the property sustained substantial damage due to a fault left unrepaired because it was missed by the surveyor.(50) In the other, the purchaser, who had intended to resell the property three years after purchase, discovered the first survey had missed substantial faults in the property not only making it impossible to complete the contract of sale but also rendering the property uninhabitable.(51)
It was the awareness on the part of the surveyor which was seen as the key to the decision on the factor of foreseeability.(52) If the surveyor was aware the prospective purchaser would probably purchase the house in reliance on the valuation without an independent survey, reliance was foreseeable. The surveyor was not allowed to depend upon a disclaimer in a contract between himself and the loan institution because it failed to satisfy the requirements of the Unfair Contract Terms Act of 1977,(53) although a disclaimer that satisfied the Act would have foreclosed liability.
In finding sufficient proximity for a duty of care, Lord Templeman argued it was the valuation fee that was ultimately paid by the purchaser through the mortgage agreement and the knowledge on the part of the surveyor that the purchaser would rely upon the survey in deciding whether or not to purchase the property which made it foreseeable and established sufficient proximity to require a duty of care from the surveyor to the purchaser.(54)
2. Ship Classification Company
Ship classification is a much older institution than that of debt rating, dating back to 1760.(55) Companies such as Lloyd's Register of Shipping, which is the oldest and most distinguished, classify ships according to their condition and seaworthiness with letter and number symbols strikingly similar to those used by debt rating agencies. Insurers determine the rate of insurance a ship owner or an owner of goods who transports those goods by ship must pay for insurance, among other things, based upon a ship's letter and number classification. Purchasers of ships look to classification societies as a purchaser of real property would view a surveyor, to determine whether the ship is seaworthy before its purchase. All parties involved--insurer, ship owner and the charterer of the ship--have an interest in the classification, or rating, of the ship.
In Mariola Marine Corp. v. Lloyd's Register of Shipping ("The Morning Watch"),(56) the plaintiff purchased a yacht that had recently undergone a classification survey by a Lloyd's surveyor ordered earlier than normal due to the owner's desire to sell the yacht. The yacht was subsequently classed 100AI, which meant that in the classifier's estimation, it was seaworthy. The plaintiff alleged it relied upon the classification in purchasing the yacht, although it never personally inspected the certificate before the purchase. After the purchase, the plaintiff alleged that the yacht was negligently surveyed because there were defects overlooked in the survey which rendered the yacht unseaworthy. The plaintiff claimed damages for economic loss caused by an allegedly negligent survey.(57)
The court found that it would be foreseeable to Lloyd's that a purchaser might rely upon the classification in purchasing the yacht. The plaintiff, in an attempt to establish proximity, argued by way of analogy that just as there was sufficient proximity to sustain a duty of care of a surveyor of property to a non-privity purchaser in Smith, there was also sufficient proximity to establish a duty on Lloyd's part to a non-privity yacht purchaser.(58) Though the court concluded Lloyd's survey was negligent, it found a distinction between "The Morning Watch" and Smith which barred a finding of sufficient proximity: the purchaser in Smith effectively paid for the survey, and the yacht purchaser did not.(59) Even if it could have been argued the yacht purchaser ultimately paid for the survey in the purchase price, it was not true, as was the case with the property survey, that the sole reason for the yacht classification was for the purpose of its sale. The classification was simply ordered earlier than usual because of the sale and would have been performed in any case, and, therefore, could not be seen as being carried out for the benefit of the prospective buyer.(60) To extend liability in "The Morning Watch" would have unacceptably expanded the scope of duty in respect to negligent advice to include not only those persons in a professional or commercial context to whom these defendants give advice, that is, where there is relatively close proximity, but also to any other person who might choose to act upon it.(61)
3. Valuer of Securities
The valuer of securities in Arenson v. Arenson(62) was sued for negligently undervaluing the shares of a company held by a former employee. The employee relied on the valuation of the shares in selling them to his former employer. The company, shortly after the purchase from the employee, sold the same shares on the public market for six times their appraised value.(63) The valuer, an accounting firm traditionally kept by the company for performing such services, argued it was immune from liability because it acted as an arbitrator, arbitrators being immune from a claim of negligence.(64) the panel rejected this claim and followed Hedley Byrne: "all persons who express an opinion which is negligent are liable for that negligence to persons who are within a relationship which is recognised by the law and who have suffered damage as a result thereof."(65)
In Arenson, it was clear the valuer owed a duty to the company based upon its contract, and it was also clear that a contractual duty was not necessary to establish a relationship between the valuer and the plaintiff. However, the extension of a duty of care from a rater to an investor so remote as to be unknown to the rater may not naturally follow from the circumstances in Arenson where reliance by the plaintiff was imminently foreseeable. As Lord Salmon noted, the argument that a securities valuer owes a duty to a party in contract because of their proximity but no duty to whomever he does not have a contract because that would expose the valuer to unacceptable risk of suit is fallacious in Arenson because the valuer had assumed the added risk of being sued in negligence when it signed the report in the prospectus issued to the public.(66) Lord Salmon wrote:
If they [the valuer] had negligently overvalued the shares, they
could have been sued by all those members of the public who had
bought shares on the faith of the negligent overvaluation. If they
had negligently undervalued the shares they would have been sued
by their clients. This is the kind of risk which has been accepted
by innumerable firms of accountants ever since the decision of this
House in Hedley Byrne & Co. Ltd. v. Heller & Partners Ltd.
apparently without any injury to themselves or to the public
In the case of the rating agency and its liability at least to a securities holder or purchaser who relies on the rating to sell or purchase stock, there is rarely, except in the case of institutional investors, privity of contract. However, like a prospectus, ratings reach a large number of investors who, just as they would with a prospectus, rely upon a rater's evaluation. Certainly, where there is a contract, whether between company and rater or investor and rater, there is a duty of care to use reasonable skill on the part of the rater owed the corporation or investor. But would a subscription agreement be considered sufficient privity or proximity to give rise to a duty of care? A factor perhaps, but in itself probably insufficient to establish either.(68)
4. Corporate Auditor
All corporations, except those exempted, must appoint a corporate auditor in accordance with the Companies Act of 1985.(69) The auditor is charged with the duty of auditing the accounts of the company and must furnish a report to the company's shareholders.(70) The auditor in turn has a right of access at all times to the company's books, accounts, and vouchers and is further empowered by the act to require such information and explanations from corporate officers that it deems necessary in the performance of its duties.(71) The Act, amended in relevant part by the Companies Act of 1989, requires all corporate auditors to obtain "appropriate qualification" in order to be appointed a corporate auditor.(72)
In Caparo Industries v. Dickman,(73) a case involving the appointed auditor of a company, the plaintiff, a limited company, after taking over the audited company, brought action against the directors of that company and its auditor. In the action against the auditor, the plaintiff claimed the auditor was negligent in carrying out the audit and making the statutorily required report as to the value of the accounts of the company.(74) The plaintiff company, who had previously owned some shares in the company, claimed it had relied upon the report of the auditor's estimation of the company's accounts in making its decision to purchase additional shares of the company. The plaintiff's theory was that the auditor owed existing shareholders and potential investors a duty of care with respect to the certification of the accounts.(75)
On appeal by the plaintiff, it was held at common law that the auditor owed a duty to exercise reasonable care to each individual shareholder.(76) The proximity between auditor and shareholder was sufficiently close to create such a duty. In applying the foreseeability, proximity, and fairness formula to existing shareholders at the time of the report of the audit, the court found the auditor knew when it accepted the appointment that the report might be relied upon by any shareholder, regardless of whether the class of shareholders could change quickly or become very large.(77) In this regard the panel believed it significant that any shareholder at any time could be precisely ascertainable.(78) An important factor in the fairness analysis was the fact that the auditor's removal from the appointment would not alone provide adequate redress for economic loss incurred as a result of reliance upon a negligent report.(79) To prevail on a claim for negligence in the performance of a duty of care, the plaintiff need only establish: (1) that the defendant failed to exercise the reasonable skill and care of a competent person within his profession; (2) that the plaintiff relied upon the defendant's advice or communication; and (3) that the damage resulted therefrom.(80)
As to the issue of a duty of care to potential investors who held no shares in the company at the time of the auditor's report, the court did not extend liability.(81) The court found the relationship between auditor and potential investor not as close or proximate as the relationship of auditor and shareholder. Although the auditor's report was available to the public and economic loss by this class of plaintiff was foreseeable, there was, nevertheless, no statutory obligation to report to this class of investor that was essential to the finding of proximity in the case of existing shareholders, and moreover, according to the reasoning of the court, it was not just or reasonable for liability to be extended in this instance.(82)
The auditor was hired directly by the directors and had the duty to investigate and form an opinion on the adequacy of the company's accounting records and returns on its accounts and later to report to the company's members.(83) There was no question whether under the circumstances the auditor owed a duty of care to the company. A duty was plainly implied in the contract between company and auditor. The auditor's knowledge, like the knowledge of the surveyor in Smith, that their report would be communicated to the shareholders sufficed for the finding of foreseeability.
As to the question of proximity, Lord Bingham argued that the auditor took direct responsibility for the shareholders.(84) The auditor accepted the appointment in the ordinary course of professional practice, was compensated for its duties and would perhaps obtain additional work from the company in the future. Although there was no contract between the auditor and the shareholders, Lord Bingham believed they were very close to the contract, the shareholders being the actual owners of the company who appoint the board that makes the contracts.(85)
The imposition of the duty from auditor to shareholder was fair, he believed, because removal of the auditor as allowed by statute was not adequate redress given the duty that already existed under the contract. An imposition of duty would neither lead to a significant change in audit practice nor be so unfair as to lead competent auditors to decline work or subject auditors to astronomical numbers of claims.(86)
B. Conclusions as to Duty of Care in England
Applying the English formula for determining whether a duty of care exists--foreseeability, proximity, and fairness--against the background of the cited cases, we now turn to the circumstances of rating agencies and the issue of whom they would owe a duty of care. As mentioned earlier, if there is a contract between any of the parties to be discussed, the issue of liability would turn on whether the liability sought to be established is allowed or excluded under the contract. The following instances discuss the liability of raters to parties with whom they have no contract.
1. Rater Liability to Shareholder
It is certainly foreseeable to the rater, as it was to the auditor in Caparo Industries, that all potential purchasers of securities of the rated corporation may rely upon a negligent rating to their detriment. However, such a scenario borders on what then-New York Chief Justice Cardozo called "a liability in an indeterminate amount for an indeterminate time to an indeterminate class."(87) The more "proximate" the securities purchaser, the more reasonable the foreseeability; and, therefore, the more reasonable the application of a duty. A key factor of proximity in Caparo Industries was the statutory duty of the auditor to report its findings to the shareholders.(88) There is no such statutory duty for a rating agency.
Where the rater is hired directly by the company to formulate a rating for that company, a duty of care exists from the rater to the company because of contract. Although there is no statutory requirement in cases concerning rating agencies analogous to that of the auditor, it is still reasonable to assume raters are aware their ratings will be consumed by many shareholders, thus satisfying the foreseeability requirement. Arguing from the basis of its contract with the company, it can be asserted that raters voluntarily assume direct responsibility to shareholders, who are the ultimate owners of the company.(89) Where a rater accepts the work of formulating a rating for a company in the ordinary course of professional practice, is compensated for its duties and would perhaps obtain additional work from the company, it may be further argued that shareholders are close to the contract, despite the fact that there is no contract between the rater and the shareholders. However, without the statutory requirement to report its findings to the shareholders, there may not be a sufficient nexus between the shareholder and the rating agency to establish proximity.
The imposition of the duty from rater to shareholder is arguably fair in light of the damage done to shareholders by negligent ratings: simply firing the rater would not be adequate redress. Given the duty that already exists under contract, it would not be unfair to extend liability because such liability theoretically would not lead to a significant change in the rater's business practices. Neither would it lead raters who employ rating contracts to decline work, nor would it realistically lead to subjecting raters to astronomical numbers of claims.(90)
A rater may not avoid a duty of care to shareholders even where there is a specific disclaimer of responsibility in the contract where the contractual disclaimer is not delivered to the shareholders. In Smith, the surveyor of property was held to a duty of care to the purchaser despite the lack of contract, and even where the contract between surveyor and mortgagee contained a specific disclaimer.(91) Under the Unfair Contract Terms Act of 1977, the surveyor, a professional under the Act, was required to deliver a copy of the contract on the purchaser.(92) Accordingly, it may be prudent practice for rating agencies to provide copies of contracts and disclaimers therein to shareholders of corporations which they rate.
2. Rater Liability to Securities Purchaser
In the absence of contract, it would seem, when one considers Caparo Industries, "The Morning Watch," and Smith, a duty of care from rating agency to potential purchasers of securities would most likely not exist regardless of whether the purchasers were individual or institutional investors or corporate raiders. As previously mentioned, the duty of care demands a requisite degree of foreseeability and proximity before application is possible.(93) Once these criteria are met, a duty of care will be found only when finding so is fair and just in the circumstances.
In Caparo Industries, a duty of care was found for auditors as to existing shareholders but not as to potential shareholders. The necessary nexus of closeness and directness of the relationship between auditor and potential shareholder was not tight enough to justify the imposition of the duty even if injury to that class was foreseeable.(94) Further, the court found the imposition of a duty to the class of potential securities purchasers was fair and reasonable because the class is potentially very large and the liability too great.(95) Moreover, both "The Morning Watch" and Smith make clear that extending liability on behalf of potential securities purchasers who have no specific contract for a rating, and at most only a subscription agreement, may unacceptably expand the scope of duty in respect to negligent advice to cover not just those persons in a professional or commercial context to whom these defendants give advice but also any other person who might choose to act upon the recommendation.(96)
3. Rater Liability to Rated Company
The case of the unsolicited rating damaging a company is a special one because there exists no contract or relationship that may be close enough to the damaged company to maintain an action for duty of care. Quite often agencies will rate companies with which they have no contract in order to complete their portfolio to subscribers. The only privity would be the subscription contract between rater and subscriber. Institutional investors have individual contracts with raters from time to time requesting ratings on companies and securities specific to their investment needs. In either event, the imposition of a duty of care upon a rater of a company or its securities based upon these relationships is foreclosed by the proximity requirement even though injury to the rated company is foreseeable and imposition of such a duty may be fair.
A different set of relationships develops when an investor contracts for a rating of a company which he intends to purchase. In this situation a duty of care could be reasonably argued for in circumstances similar to the following. A corporate raider contracts with Acme ratings to rate the securities of B company, which it intends to purchase in a hostile takeover. The rating is negligently prepared by Acme and substantially undervalues B company's securities. The rating is given to the raider and is also published in Acme's ratings publication, which is distributed to the investing public. The market reacts to the news, which precipitates a drop in the value of the B company's securities, making it ripe for takeover. The corporate raider snaps up B company's stocks at deflated prices and reaps a windfall when the market readjusts to the correct value of the securities.
Foreseeability and fairness are squarely in the corner of B company and its shareholders in this hypothetical. It is the proximity, i.e., the closeness and directness of the relationship between the rater and B company, which is difficult to establish to the degree necessary for an application of a duty of care. However, relatively weak proximity may be overlooked in a case such as this one where injury is so foreseeable and it is inherently fair and just to impose such a duty.(97)
Where companies receive rating agency advice on how to structure its credit, hybrid preferred stock, sale of accounts receivable or other financing techniques in order to improve or maintain its rating position, it would seem the agency owes a duty of care in light of Caparo Industries, The "Morning Watch" and Hedley Byrne. Where reliance is foreseeable as it is in this case and the defendant voluntarily assumes responsibility to the plaintiff and the plaintiff relies on that assumption of responsibility, proximity is often found.(98) Agencies may counter that the imposition of a duty might foreclose the offer of such advice in the future--an undesirable result for companies wanting a short-cut to a better rating--and, thus, that it is arguably unreasonable or unfair to impose a duty. This is by no means a damning argument against the imposition of a duty. The rater is primarily in the business of providing the rating and not chiefly in the business of explaining how one might achieve a favorable one. Discouraging the offer of financial restructuring advice through the imposition of a duty does not affect the business of providing ratings; it will simply create more caution on the part of raters in providing advice, or at the very least, result in the acceptance of disclaimers of liability before the advice will be offered.
C. Duty of Care in the United States
So far, there have been only two American cases which deal directly with the duty of care of a rating agency. The first considers a rater's duty to an investor who relies upon the description of securities in a rater's publication. The other treats the liability of a rater to an investor for a falsely high rating. Lastly in this section, we turn to rating agency liabilities under United States federal law.
1. Rating Agency Duty to Investor/Subscriber
First Equity Corp. v. Standard & Poor's Corp.(99) involved a corporate investor who relied upon arguably misleading information about a security in the regular publication of the rater to which the investor was a subscriber. The Court of Appeals for the Second Circuit read the rater's publication to imply that the security in question contained a provision for the payment of accrued interest by the issuer from its recall date to the date of its redemption.(100) In reality the indenture made no such provision. The plaintiff had even gone so far as to contact the rater personally to confirm the accuracy of the description.(101) The plaintiffs, First Equity Corporation and a client of First Equity that bought substantial shares on First Equity's advice, argued that the publication was negligently or fraudulently made and had caused them to suffer loss. They claimed as damages lost profits amounting to approximately $260,000 that they would have received if the rating agency's description had been true.(102)
The Second Circuit, interpreting New York(103) and Florida law,(104) affirmed the District Court decision refusing to extend a duty of care to rating agencies in such cases. The court considered the subscription agreement as insufficient to establish the degree of privity of contract necessary to give rise to liability in the face of other important factors.(105) The publication was widely distributed among the financial community, and therefore, the application of a duty would result in a potentially large plaintiff class.(106) The court's reasoning for not extending liability on this point seems to rest on two considerations: first, such an extension would expand negligent speech liability as to make it nearly coterminous with fraud liability; and second, negligent speech liability would potentially extend to professions other than rating, such as law and accounting.(107) Additionally, even a careful preparation of the publication would result in some errors, and the plaintiffs were the ones in the best position to determine the accuracy of the publication and could easily have protected themselves from misstatements and inaccuracies by examining the original documents or federally-required prospectuses.(108)
The Second Circuit considered the factual circumstance of Standard & Poor's to be somewhere between that of accountants, whose work typically consists of a report involving a single company disseminated to an interested public consisting largely of professionals, and that of a newspaper publisher, which entails reports on numerous matters to the general public.(109) The court concluded that the Standard & Poor's publication in question, Corporation Records, contained information regarding a large number of companies and was disseminated to an interested public of professionals and held that New York would decline to extend Standard & Poor's liability to the publication's "full universe of subscribers and readers. . . ."(110)
2. Rating Agency Duty to Investor/Ratings User
In Mallinckrodt Chemical Works v. Goldman, Sachs & Co.,(111) a rating agency was absolved of liability to investors who had relied upon an overly optimistic assessment of a commercial paper issue of the Penn Central Transportation Company. Shortly after the plaintiff purchased $1,000,000 of the securities, Penn Central filed for bankruptcy resulting in an almost total loss for paper holders.(112) In its action, the plaintiff alleged violations of the Securities Acts of 1933 and 1934, the General Business Law of New York, and common law fraud and negligence. District Judge Tinney dealt thoroughly with the federal securities claims(113) while barely treating the negligence claim at all, except to say without citation that "ordinary negligence is not actionable."(114) A closer evaluation of the facts of the case indicates that the judge's assessment was questionable.
A wholly-owned subsidiary of Dun & Bradstreet called National Credit Office (NCO), a rating agency, had rated Penn Central's outstanding commercial paper as "prime," the agency's highest rating.(115) Plaintiffs in this action, both institutional and private investors, had a policy of investing only in those securities rated "prime" and claimed reliance on this rating in purchasing the paper. In examining NCO's method of determining that the Penn Central paper was "prime," the court limited its analysis to the conditions existing on the date of sale of the securities and the time preceding that date.(116)
NCO's method for determining whether a company's commercial paper offering would be deemed "prime" was simple: the sole criterion was whether a company's net worth exceeded $25 million. The court refused to probe whether this method accorded with what a reasonable rater of commercial paper would employ. The court found no evidence on the date of the sale of the securities that NCO believed its rating of "prime" to be incorrect.(117) The court made this judgment even though it was known to NCO that PCTC showed a deficit of working capital for the two previous years totalling $262.7 million.(118) Judge Tinney pointed to PCTC's net worth of $2.81 billion as sufficient accounting on NCO's part to justify the rating according to its own procedure, and opined that if there was a misstatement of fact, it was an unwitting one. Moreover, the court held that a rating agency has no duty to investigate the information provided to them from a corporation about which it fixes ratings, at least when it does not represent that it has.(119)
In criticizing the District Court's decision in Mallinckrodt, one may recognize that the accounting method of NCO, debt and losses minus net worth, was obviously inadequate in assessing the rating of Penn Central's commercial paper. Considering the necessity of investor confidence and federal legislation designed to promote it, a more appropriate move for the District Court may have been to impose something amounting to a minimum standard accounting method for the assessment of ratings similar to that imposed upon accountants. In providing the minimum standard to promote reliable results, courts would not be forcing a burdensome and artificial system upon debt rating agencies. Accuracy is beneficial not only to the individual investor or confidence in the market, but also to the interests of the debt rating agencies themselves. Reliability of ratings is the hallmark of the industry. A court-imposed minimum standard would therefore create no hardship for agencies while protecting investors from inadequate or superficial accounting.
3. Rating Agency Liability under Federal Law
To establish liability for publishers of false statements in publications concerning securities, the Securities and Exchange Act's Section 10b and the Securities and Exchange Commission's Rule 10b-5, as interpreted by the courts, require plaintiffs to show actual knowledge that a publication was false and their reliance on the misstatement in the publication.(120)
When a rating agency publishes its ratings on securities offerings, to succeed under Section 10(b) a plaintiff must prove by competent evidence that it acted in reliance on the agency's false statement and that the agency published the false statement with intent to deceive, manipulate, or defraud.(121)
Adding the further requirement of an intent to deceive, manipulate, and defraud because some element of scienter is necessary to maintain an action for civil damages, the Supreme Court required such a pleading of intent in an action for civil damages under both Section 10(b) and Rule 10b-5 for fraud, untrue statement, or omission of a material fact.(122)
Under Rule 10b-5, there are three established categories of the liability of rating agencies to purchasers of securities who do not stand in privity with those agencies. The first transpires when a rating agency is possessed of inside information or holds greater access to information concerning the rated company issuing the security than did the investors.(123) Second, non-privity liability may arise when a rating agency participated in the underlying securities fraud of a rated company, and the fraud damaged the investor.(124) Finally, liability may arise where the rating agency conspired with or aided and abetted any other parties charged with fraud or other misconduct.(125) In all three categories of claims, the plaintiff carries the burden of proof of scienter,(126) that is, the burden of proving that the defendant knew material facts were misstated, should have realized or failed or refused to discover and disclose the statements as false when it was readily available to him to do so and he had reasonable grounds to believe the facts were misstated.(127)
D. Conclusions as to Duty of Care in the United States
Where an investor and a rating agency have a more substantial relationship than a subscription agreement, such as a general contract to provide requested ratings to an investor, such an agreement may provide sufficient privity for an extension of liability for mere negligence in the preparation of a rating. The pitfalls of the extension of liability pointed to in First Equity III, namely equating negligent speech liability with fraud and an exposure of the liability to other professions, could be avoided in the contract context. A contract to provide specific ratings would give rise to a duty on the rater's part to use reasonable care in preparation of its ratings. The accounting standards of Mallinckrodt, though arguably inadequate, provide a clue to an acceptable minimum standard of reasonable care: if net worth minus debt is more than $25 million, the companies security should carry the highest possible rating.
Two considerations must not be overlooked in reference to these conclusions, however. First, with regard to liability based on sufficient privity, an investor could waive a right of action for negligence through an exclusionary clause in the contract. Second, the accounting methods used by the defendant in Mallinckrodt could actually withstand scrutiny when compared to the methods presently used in the rating community.
III. DEFAMATION AND DEFENSES
Though the common law of defamation in the United Kingdom and the United States is quite similar, the method with which rating agencies may be dealt is potentially very different. In England, the protections for defendants in defamation actions are limited to the defenses of justification, absolute and qualified privilege, and fair comment. In the United States, the U.S. Constitution and its interpretation by the Supreme Court create special protection for media defendants under the freedom of the press clause of the First Amendment.
A. English Defamation Law
In England, all legal persons, including corporations, have a right to the unimpaired possession of reputation and good name. For a communication to be defamation it must not fall within one of the many exceptions to defamatory statement, for example, justification, privilege, fair comment or criticism, or reports concerning judicial, parliamentary or other governmental proceedings.(128) The communication of material concerning an individual, natural or corporate, with malice, from one individual to another, which is likely to damage the reputation of that individual and where the material does not fall within one of the accepted categories of defense, is defamation.(129) The communicating party of such material is liable for damages in tort. A defamation in permanent form, such as in newspaper or even television reports, is libel, as opposed to slander, a more fleeting form of publication.(130)
Companies may be libeled by defamatory publication on a matter that relates to its business or the conduct of its affairs.(131) Interestingly, trading companies may sue for damages where a libel resulting from a publication impugns insolvency or any other matter which may injure its business.(132) A rating of the probability of the repayment of a corporation's debt which states falsely that the corporation is more likely than not to fail to repay the principal on a loan, or in the alternative, that it will be unable to meet its obligations on commercial paper issues arguably impugns insolvency and will most certainly injure its business. Such a false rating would present a prima facie case of defamation.(133) The question remains: does the rating agency have a defense beyond justification?
Perhaps, but if the rater could prove the rating is true, there is no need to go further. Truth of the statement or justification is an absolute defense to defamation.(134) However, suppose the rater were unable to demonstrate that its rating were true, given that the burden of proof would be upon it.(135) The rating agency would be forced to pursue another defense.
Defamatory material published during judicial, parliamentary and certain other official government proceedings are absolutely privileged and will not give rise to an action of defamation.(136) Qualified privilege, on the other hand, extends to far larger number of cases and presents some interesting avenues of maneuver for the rating agency.
There are three basic elements that are necessary before a qualified privilege is established. The privileged occasion must be appropriate, the published matter must have reference to the occasion, and the matter must be published from an honest belief or motive.(137) In the case of absolute privilege, the defendant need only show that the occasion was proper, such as in the case of an official government proceeding, and that the privilege follows. However, with qualified privilege, even when the defendant has established the occasion as proper, the privilege does not automatically follow. One must further show that the occasion was used in a manner appropriate to the privilege, that is, that the defendant published the defamatory matter without "motives of personal spite or ill-will independent of the occasion on which the communication was made."(138)
Once it is determined that the occasion was privileged and that the defamatory matter complained of has reference to the occasion, the remaining determination is whether the publication was made with malice.(139) If so, the defense of privilege fails. To better illustrate the interplay between privileged interest and the publication sought to be defended as privileged, a fine as well as terse characterization describes the relationship thusly: "It is not enough to have an interest or duty in making a communication, the interest or duty must be shown to exist in making the communication complained of."(140)
Of the several qualified privileges possible, those appropriate in this context are communications made in the interest of the addressed and fair comment.
1. Communications Made in the Interest of the Addressed
The Chapman v. Ellesmere case(141) is an excellent explanation of a qualified privilege and how far it extends. A horse trainer had been "warned off" by the stewards of the jockey Club in an inquiry into the doping of a horse.(142) In accord with a licensing agreement to which the trainer was a party, such incidents were to be published in the Racing Calendar, a trade publication. The incident was further reported in The Times as well as through other news organizations.(143) The trainer sued all publishing parties alleging the communication was defamatory.(144) The defendants responded with a defense of qualified privilege, reasoning that the public interest was served by the publication. The court held that the Racing Calendar was protected by the privilege where the other news agencies were not.(145) The court stated that the stewards had a duty to report their decision to the racing public, who had a corresponding interest in it. Furthermore, the plaintiff had agreed, under the licensing agreement, to such a publication.(146) Because the interest was in only of a specific segment of the public, the "racing public," the publication was not privileged in the other news agencies such as The Times which distributed far beyond the segment to which the privilege extended.(147)
Generally speaking, a qualified privilege for a communication made in the interest of the person addressed arises where an individual "is so situated that it may be morally right for him to tell a third person of what he believes to be a fact."(148) In other words, the facts communicated must be important for the third party to know, must be for the guidance and regulation of that person's conduct, and the person communicating the information must have a duty to do so.(149) If the communication cannot influence the conduct of the individual addressed, it is not privileged.(150)
The defense of qualified privilege may be logically argued on the part of a rating agency where it can be shown the rater has a duty to communicate to the recipient because ratings of securities, commercial paper, and corporate debt are important information for the investing public and loan institutions, and those ratings can and do affect the conduct of individual and institutional investors and loan institutions. The difficulty is to establish the duty to communicate on the part of the rater.
In cases similar to that of rating, trade protection societies have successfully argued privilege in defense of defamation. In Macintosh v. Dun,(151) a society successfully argued privilege where it gave information concerning the commercial standing of the plaintiff to the society's subscribers confidentially and in response to the specific inquiries of the subscribers. A later decision applied the same principle, though it questioned the soundness of the Macintosh decision,(152) to a trade protection society with 6000 members all of whom paid a yearly subscribers fee for the service. More recently, it was recommended that all credit bureaus, whether organized for profit or not, should be protected by a qualified privilege.(153)
It should be noted that liability of a rater for a negligent rating that harms the business reputation of the rated company or causes the loss of investment capital of an investor can be exempted by contract,(154) thus, making the privilege redundant since the rater is already protected by contract from the liability.
2. Fair Comment
According to some, fair comment is not a qualified privilege at all, but a separate defense in its own right.(155) The burden of proof for fair comment is different than that of privilege in that the defendant must prove the comment was fair, that is, to express a view on a matter of public interest.(156) In the case of privilege, the defendant must prove the occasion was privileged and the plaintiff may overcome the privilege by proving the communication was made with malice.(157) Another important distinction to the defense of fair comment is that the defense extends only to the comment itself and not to the underlying facts upon which the comment is based.(158) If there is a defamatory sting in any of the facts on which the comment is based, those statements of facts can only be defended by justification.(159)
To sustain a defense for fair comment, a rating agency defendant must show its comment was on a matter of public interest and it communicated a comment on the matter and not a fact.(160) Matters upon which fair comment is allowed include comment upon the conduct of private businesses if they are sufficiently large and relate to a large number of persons.(161)
B. Conclusions to Defamation in England
1. Qualified Privilege
In pleading a qualified privilege for communications made in the interest of the party addressed, the rating agency must show the communication of the facts must be important for the party to know, must be for the guidance and regulation of that party's conduct, and the agency must have a duty to communicate.(162) The first and second requirements are quite easy to show. Ratings are important information for investors who use it, and they affect investment choices which those investors make. It is the third requirement which may be difficult to overcome. Where the rating agency and investor or investors have a contract to provide the specific offending rating, there exists a duty which seems sufficient. However, where the duty is sought to be derived from a subscription agreement, it may be unreasonable to argue the rating agency had a duty to communicate the defamatory rating of the plaintiff's company or security in its general publication. Particularily, where there was no specific contract for that particular rating.
So where there is a defamatory rating, the defense of qualified privilege may be available as to its publication to parties who have specifically contracted for it, but the defense may not extend to its publication to regular subscribers of a rating agency publication. Because the latter is the heavier burden of liability, the rating agency may want to argue fair comment in the alternative.
2. Fair Comment
In the alternative, the rater may argue it was expressing a view on a matter of public interest and communicating a comment and not a fact,(163) in order to sustain a defense of fair comment.(164) Arguably and perhaps indisputably, ratings are a matter of public interest. In order for a communication to be fair comment, the agency must show the communication was comment and not fact. If the publication is held to be fact, only justification, or truth, will avert defamation liability. Similarly, the facts that are the basis of the comment must be correct to secure fair comment's protection.(165) The basic facts are those which go to the substance of the matter and are those upon which the comment is based.(166) The agency, in pursuing this defense, must be prepared to substantiate the accuracy of the basic facts of its comment.(167) Finally, the company that is defamed by the comment must be sufficiently large and relate to a large number of persons.(168)
In publications that give more detailed accounts or explanations of how a rating was reached, and the facts relied upon in the formulation of the rating are shown to be false, then the defense of fair comment fails.(169) The same holds true where the agency did not publish the underlying facts and failed to show the truth of those facts at the Bar in pursuit of the fair comment defense.
C. American Defamation Law and the First Amendment
As pointed out in the section on English defamation law, a defamatory statement impugning solvency or relating to the business of a trading company is actionable defamation under English law, and the plaintiff will prevail if the defendant cannot show the statement was privileged.(170) Similarly, a change in a rating can impugn insolvency, reflect poorly on a company's strategy or at least adversely affect the business of a company. A debt rating of "AA" which is lowered to a rating of "BBB" means, under one agency's scheme, the corporation had a "very strong capacity to pay interest and repay principal," but now is regarded as having only an "adequate capacity to pay interest and repay principal."(171) However, under the American scheme, the defamation analysis departs from the English discussion of privilege and hinges on a complex examination of the American Constitution's First Amendment protections of freedom of the press.(172)
In the United States, where the world's leading raters are headquartered, rating agencies consider themselves to be members of the class of the media.(173) Through this categorization, they invoke the very substantial protection of the First Amendment. The history of press protection through the First Amendment in the United States is a long and interesting one and cannot be addressed at length in this application. However, a brief overview will serve to clarify the different kind of defamation liability rating agencies may face in the United States.
The modern view of first amendment protection for media defendants evolved from the 1964 New York Times Co. v. Sullivan decision.(174) Since that time, the court has expanded and contracted Sullivan's first amendment protection of freedom of the press. At the present time, as a general matter, in the area of defamation law, when attempting to pin liability for libelous speech upon the media or individuals or organizations engaged in the same activities, the First Amendment protections are the same: where the defamatory publication is the publication of opinion,(175) about a public individual(176) or involves a matter of public concern,(177) a plaintiff must prove actual malice on the defendant's part,(178) that is, publication with actual knowledge the material was false or with reckless disregard for its truth or falsity.(179) In addition, actual malice must then be proved by clear and convincing evidence and not by simple preponderance.(180) Where the defamatory publication involves the publication of fact concerning a private individual on a private issue, liability accrues for simple negligence without showing particular damages or a showing of malice for punitive damages.(181) Thus, if at any one point in the analysis the court finds the plaintiff is a public figure, the defendant published an opinion or the published matter is of public concern, the plaintiff inherits the onerous actual malice burden of proof.
1. Ratings: Expression of Opinion or Fact?
Understandably, raters submit that their ratings and publications are expressions of opinion.(182) Definitions of fact and opinion, as found in both American and English law both support and weaken this position.(183) When approached logically, at its extreme, one must concede "everything in the cosmos is a fact or phenomenon. . . ."(184) Fortunately, we are not left to chart the philosophical expanse between these extremes without some guidance from the courts.
The importance of the distinction between fact and opinion is that expressions of opinion are fully protected whether or not the plaintiff is a private figure or the matter which is published is of public concern.(185) In Gertz v. Robert Welch, Inc.(186) the Supreme Court first established the opinion versus fact distinction in dicta. The Court wrote:
Under the First Amendment there is no such thing as a false idea.
However pernicious an opinion may seem, we depend for its correction
not on the conscience of judges or juries but on the competition
of other ideas. But there is no constitutional value in false
statements of fact. Neither the intentional lie nor the careless error
materially advances society's interest in "uninhibited, robust, and
wide-open debate on public issues."(187)
Unfortunately, little guidance was provided in Gertz as to how this principle distinction should be discerned.(188) Several circuits, following the dicta, attempted to create a discerning test.(189) However, it was not until the District of Columbia Circuit Court of Appeals developed a test in Ollman v. Evans(190) that any one method for the distinction between fact and opinion found wide acceptance.(191) The Ollman v. Evans test was not intended as a lock-step analysis but rather a balancing of the "totality of the circumstances" surrounding an allegedly libelous statement.(192) A court must consider the common usage or meaning of the statement, degree to which the statement is verifiable, examine both the context in which the statement occurs, and the broader social context into which it fits.(193)
a. Common Usage
In defining common usage, the court gave examples of statements the likes of which would, based upon their common usage, be perceived as statements of fact: the accusation of criminal conduct or corruption by a public official.(194) In the court's view in this context, an expression of opinion would be an accusation in which a public official is accused of incompetence because the statement is too vague.(195) The important consideration in this stage of the analysis is whether the allegedly defamatory language has sufficient definite meaning to convey facts, for example, an accusation of corruption carries with it an implication of illegal activity whereas the accusation of incompetence conveys no specific act, legal or illegal.(196) Statements that are loosely defined or variously interpretable are not of sufficient factual quality to support an action for defamation. An example of the pitfalls that may await a plaintiff who pursues an action for defamation is Buckley v. Littell,(197) a Second Circuit case cited in Ollman v. Evans. The Second Circuit held the branding of a well-known author and commentator, William F. Buckley, Jr., as a fascist by another author in his book was not "|statements of facts, among other reasons, because of the tremendous imprecision of the meaning and usage of these terms in the realm of political debate. . . .'"(198)
The symbolic language of rating is more akin to the statement that a public official is incompetent than it is to the statement that the official is corrupt. A rating symbol does not carry a definite meaning in the same sense as an accusation of criminal conduct or corruption though it does have tangible financial consequences. The power of the symbol should not be denied. In one now infamous illustration, the outside directors of General Motors led a corporate coup d'etat against the corporate chairman because of the threat of a downgrading of GM's securities rating.(199) A practical financial consequence of an even minor downgrading of a rating from "A" to "A-" would be to raise the loan liability ten to fifteen basis points. The concrete result of such a lowered rating would increase a corporation's interest liability by $1500 per year on a loan of $1,000,000. However, corporations regularly borrow in the hundreds of millions making the difference in interest payments in the millions or tens of millions of dollars per year depending upon the life of the loan.
On the other hand, a dramatic change in a rating, including a demotion that results in a change in the security's status as approved for institutional investors of pension funds, may convey sufficient facts to be considered an expression of fact in relation to strengths in the verification or context portions of the test. A change in rating so dramatic that the company was once considered imminently capable to meet its financial obligations but now is unlikely to meet those obligations, implies a once strong company is no longer financially sound or is on the verge of bankruptcy. Be that as it may, although a rating may be factually weak on the common usage step of the inquiry, it may recover sufficiently under the verifiability and context analysis to secure status as fact in the courts.
Proposing the average reader would not take a statement as factual unless it was believable and therefore verifiable, the Ollman v. Evans court distinguished statements of fact and opinion as to whether the statement is objectively capable of proof or disproof.(200) The court surmised where a statement lacks plausible verification, the reader will not believe the statement has a specific factual content.(201)
The verifiability of a rating is somewhat difficult to determine within the analysis. Rating agencies pride themselves on the accuracy of their ratings, but accuracy does not necessarily equate with verifiability. A rating does not lend itself to verification in the same way a statement of fact such as "Company A is insolvent" does, for the rating is a presumption that a company is more or less likely to meet its financial obligations on debt or securities. Nevertheless, the accounting methods and procedures employed in devising a rating can be checked for accuracy and depth of inquiry; so, in a sense the rating is "verifiable." But provability that a rating inaccurately described corporate creditworthiness combined with its weakness in common usage does not in turn lead to a holding that the rating was a statement of fact.
c. Context of the Statement
The general context of a statement is the entire statement or article, taken as a whole, the context of the article,(202) and though less dependable a consideration, the inclusion of cautionary language in the text in which the offending statement is found.(203) The broader social context in which the statement occurs is also a factor in context. Custom, the reader's understanding of the statement, and the genre of the particular writing in which the statement is found were all considerations in evaluating the factualness of speech in terms of its social context.(204) The labeling of a fellow postal worker as a "traitor to his country" during a strike was considered opinion because such exaggerated rhetoric was common to labor disputes.(205) Defamatory statements made on an editorial page are generally perceived to be opinion.(206) A rating is very different than an accusation of betrayal in a labor dispute or an expression of opinion on an editorial page.
Different types of writing have varying social conventions that signal to the reader the likelihood a statement should be taken for fact or opinion. Rating agencies attempt to influence this perception in their publications with caveats and assertions that a rating is an opinion or a prediction and not a statement of reality or fact.(207) Despite the attempt, contextually speaking, a rating is arguably almost universally taken to be fact, but in a different sense than ordinarily conceived. When one observes the process of the formulation of a rating, it appears to be very close in some respects to contract negotiation, negotiation for the terms of a loan agreement, formulation of corporate economic and business strategy, and the relationship between board of directors and shareholders. Rating agency expression is influential to the point that corporations will go to extreme lengths to court their favor. Corporate coups, change in business strategy, creation and formulation of the terms of securities offerings, and avoidance or arranging of new loans are all performed for the benefit of improving a rating.(208) The perception of the consumers of ratings, corporations, institutional, and individual investors, is such that a particular rating has a concrete business and financial meaning. If a rating is low, investors either will not or may not buy a security. Many institutional pension fund investors invest pension money only in those securities above a certain rating furnished by certain raters.(209) To fail to maintain or achieve that rating from one of those raters prevents institutional pension funds from investing their billions in that bond.
From the viewpoint of the context in which the rating is made, a rating's common usage becomes clearer. The rating consumer has the expectation the information is an actual representation of the corporate creditworthiness or the financial viability of securities offering, and this very concrete perception will in turn develop very tangible effects on the loan relationships and securities' values of rated companies and securities.
2. Rated Corporation: Public or Private Individual?
Once a statement is established as fact, a further step in the First Amendment analysis is a determination of whether the plaintiff is a public or private figure. As discussed above, the Court for the first time, in Sullivan, held the First Amendment limits the reach of state defamation laws(210) extending first amendment protection to libels of public figures.(211) In one case cited by the Court in Dun & Bradstreet, Rosenbloom v. Metromedia,(212) it suggested in the constitutional rule should extend to libels of any individual so long as the defamatory statements involved a "matter of public or general interest."(213) In Gertz the Court held the protection of Sullivan did not extend as far as Rosenbloom suggested.(214) Gertz concerned a libelous article appearing in a magazine, a monthly publication of a politically conservative society.(215) The article in question discussed whether the prosecution of a policemen in Chicago was part of a communist campaign to discredit local law enforcement agencies.(216) The plaintiff, neither a public official nor a public figure, was a lawyer in a civil action representing the family whose child was shot and killed by the police officer who was then on trial for the youth's murder.(217) The magazine alleged he was the chief architect of the "frame-up" of the police officer and linked him to communist activity.(218) The Court found this case involved a matter of public concern, finding as in all such cases, constitutional limits to state defamation laws.(219) Moreover, the Court in Gertz held that expression involving a public issue did not in itself entitle a libel defendant to the constitutional protections of Sullivan.(220) These protections were not "justified solely by reference to the interest of the press and broadcast media in immunity from liability."(221) Rather, they represented "an accommodation between [First Amendment] concern[s] and the limited state interest present in the context of libel actions brought by public persons."(222)
In libel actions brought by private persons the Court found the competing issues to be different.(223) Because those persons have not voluntarily exposed themselves to the "increased risk of injury from defamatory statements and because they generally lack opportunities for rebutting such statements," the Court held the state retained a "|strong and legitimate . . . interest in compensating private individuals for injury to reputation.'"(224)
If the rating is established as a factual assertion, and the plaintiff is found to be a private person, the court would then determine whether the defamatory statements involve an issue not of public concern. If the issue is of public concern, the corporation must show that the false rating was made with actual malice and prove it by clear and convincing evidence.(225) If private, then the court must further decide if the alleged liable involves a matter of public concern.(226)
It is in the analysis determining whether a plaintiff corporation is public or private where the decisions of courts begin to diverge. There are basically two differing analyses for public and private corporate figures. The first was handed down in the Martin Marietta case.(227) Distinguishing this case from the decision in Gertz, which dealt with a natural private figure, the District Court held corporations by definition cannot be private persons, and therefore do not require the special treatment afforded to individuals in protecting their private lives, which involves the "essential dignity and worth of every human being."(228) The Martin Marietta court applied the test in Rosenbloom which provides that any person, corporate or natural, involved voluntarily or involuntarily in a matter of public interest can be libeled only by a false statement made with actual malice.(229) The second analysis is that of Gertz, followed in Trans World Accounts v. Associated Press.(230) Trans World Accounts rejected the Martin Marietta approach and decided the Gertz standard applied to corporations as well as natural persons.(231) Gertz established two categories of public figures: public figures for all purposes and public figures for limited circumstances. Those persons considered public figures for all purposes are those persons, both natural and juridical, which have attained a certain high level of persuasive power and influence.(232) Public figures for limited circumstances are those persons which have thrust themselves to the forefront for a particular event or which have been drawn into a public controversy and, thus, become public figures for the purpose of that particular event or public controversy in which they have involved themselves.(233)
It seems clear where a corporation seeks to sell securities, it is at least for that limited purpose a public figure because it is thrusting itself to the forefront of the public to sell its security. However, a closer question arises when a rating agency rates the credit worthiness of a corporation. As mentioned above, a low rating can adversely affect the financial standing of a corporation.(234) Such a rating can come whether or not the corporation is at the moment pursuing public attention. It may be possible, because of the inherent adverse effect of a negligent rating and because the company has not sought it, for a court to find a corporation to be a private figure for the purpose of rating where it is not a rating upon a public bond offering but upon its creditworthiness.
The discussion of whether a company may be handled as a private figure appears to be moot after the Dun & Bradstreet v. Greenmoss Builders decision where the Supreme Court found a corporation to be a private figure for the purposes of credit rating. Thus the Court applied the Gertz analysis to corporations as well as natural persons, and applied a lower standard than actual malice in a case involving the defamation of a corporation.(235) The result effectively overrules, or at least sidesteps, the Martin Marietta approach by upholding an award for defamation to a corporation on a publication of false information involving no issue of public concern.(236)
3. The Business of Rating: Matter of Public or Private Concern?
If a rating is established as a statement of fact rather than opinion and the corporate plaintiff is determined to be a private figure, the final step in the analysis is whether the factual statement is on a matter of public or private concern. The Gertz decision restricted the damages which a private individual could obtain from a publisher for a libel which involved a matter of public concern.(237) However, the state interest in a matter of a libelous publication about a private individual on a matter of private concern was considered "strong and legitimate,"(238) and a state should not be required to abandon it lightly.(239) While it is speech on matters of public (240) concern which are attributed the highest First Amendment protection, speech on matters of private concern is considered of less First Amendment value.(241) The concerns that activated constitutional regulation of state libel law in such cases as Sullivan and Gertz are not present in matters of private concern speech; therefore, constitutional regulation of state libel law is far more limited.(242) The elements revered for protection by the First Amendment in expression of public concern are the "unfettered interchange of ideas for the bringing about of political and social change,"(243) the preservation of "debate on public issues [such as the 1960's civil rights movement] [which] should be uninhibited, robust, and wide-open,"(244) as well as the fostering of "self-expression . . . [which] is the essence of self-government."(245)
The rationale of the common-law rules of defamation in awarding presumed and punitive damages has been the "experience and judgement of history"(246) that "proof of the actual damage will be impossible in a great many cases where, from the character of the defamatory words and the circumstances of the publication, it is all but certain that the serious harm has resulted in fact."(247) In matters of public concern, the state interest in protecting its citizens from defamatory statements which cause serious harm is outweighed by the first amendment interest.(248)
In Dun & Bradstreet v. Greenmoss Builders, the Court addressed for the first time whether the Gertz balance applies where the defamatory statements involve no issue of public concern.(249) The majority(250) held that, in light of the reduced value of expression on matters of private concern, the state interest supports awards for presumed and punitive damages absent a showing of actual malice.(251) Also, the majority agreed the First Amendment gives no more protection to the press in defamation cases than it does to other individuals or organizations engaged in the same activities.(252)
The plaintiff at hand was a corporation, and considered a private figure, (253) which the defendant credit rating agency had falsely reported as being bankrupt. In determining whether the speech involved a public or private issue, Justice Powell referred to Connick v. Myers, which formulated the following rule:
Whether ... speech addresses a matter of public concern must be
determined by the [expression's] content, form, and context ... as
revealed by the whole record.(254)
The Court characterized the speech in Dun & Bradstreet as "solely in the individual interest of the speaker and its specific business audience,"(255) which, "like advertising, is hardy and unlikely to be deterred by incidental state regulation,"(256) and thereby, rhetorically placed credit reporting within parameters similar to the commercial speech doctrine.(257) Other important factors in determining that credit reporting did not deserve greater First Amendment protection were the profit motivation of the speech, its "objectively verifiable" nature, and the powerful market incentive for accuracy "since false credit reporting is of no use to creditors."(258)
Dun & Bradstreet asserted the inapplicability of Gertz on private plaintiffs, eliminating their need to show actual malice and particular damages when the defendant's expression concerns a private matter.(259) Justice White agreed with the majority that the defamatory publication did "not deal with a matter of public importance."(260) Former Chief Justice Burger agreed with the majority that Gertz applies only to alleged defamation expressions relating "to a matter of public concern."(261) Both concurring Justices would have overruled Gertz outright and at least limited the decision in Sullivan.(262)
Of the four judges dissenting in the case, only Justices Blackmun and Stevens remain on the Court. Of the majority, three Justices remain: Justice Rehnquist, now Chief Justice, and Justices White and O'Connor. In a later decision, Justice O'Connor, writing for the Court, generalized the hierarchy of First Amendment protection, based upon the public or private subject matter of the speech and nature of the plaintiff:
When the speech is of public concern and the plaintiff is a public
figure, the Constitution clearly requires the plaintiff to surmount
a much higher barrier before recovering damages from a media
defendant than is raised by the common law. When the speech is
of public concern, but the plaintiff is a private figure, as in Gertz,
the Constitution still supplants the standards of the common law,
but the constitutional requirements are, in at least some of their
range, less forbidding than when the plaintiff is a public figure
and the speech is of public concern. When the speech is of exclusively
private concern and the plaintiff is a private figure, as in
Dun & Bradstreet, the constitutional requirements do not necessarily
force any change in at least some of the features of the common-law
The lack of broad dissemination of the defamatory credit report information in Dun & Bradstreet appears troublesome as applied to the question of whether the expression concerns a public or private matter. At first blush there appears to be a ready and potentially damning distinction between the credit reporting and debt and securities rating: the report was circulated to specific subscribers who contracted for the information and there were only five recipients of the report.(264) Upon closer examination of the part of the opinion to which a majority of the Court agreed, however, the limited circulation of the speech did not control so much as the fact that "[i]t was speech solely in the individual interest of the speaker and its specific business audience [that] ... warrants no special protection when--as in this case--the speech is wholly false and clearly damaging to the victim's business reputation."(265) The fact that only five subscribers received the defaming report did not factor directly in determining whether the speech concerned a public or private issue, but was used to point out there was no "strong interest in the free flow of commercial information,"(266) raising once again the possibility of commercial speech protection.
Thus, when the speech at issue in the individual interest of the speaker and its specific business audience, it does not require "special protection to ensure that |debate on public issues [will] be uninhibited, robust, and wide-open.'"(267)
Though debt and securities rating is arguably a closer question than the credit reporting in Dun & Bradstreet, it nevertheless remains an expression in the individual interest of the speaker and its specific business audience. It may be an overstatement to say that debt rating is the type of speech which should be earmarked for the highest calibre of First Amendment protection; that it is "one of the major public issues of our time,"(268) debate upon which "should be uninhibited, robust and wide-open."(269) Speech in the individual interest of the speaker and its specific business audience warrants no special protection when, the Court adds, "the speech is wholly false and clearly damaging to the victim's business reputation."(270) Here the verifiability question is once again raised. Whether a corporation has filed for bankruptcy or not certainly leaves no room for shades of gray. With debt rating on the other hand, it may be difficult for even the rating agency to justify the difference between an "A" and an "A-" rating. There is a considerable difference logically between the credit report's negative statement and the positive truth and the shades of difference on the scale of a debt rater's ratings. It would be quite difficult to characterize as "wholly false and clearly damaging" the lowering of a rating from AA, a very strong capacity to pay interest and repay capital, to A, a strong capacity to repay the same.(271) However, the more dramatic the demotion in rating the more likely the statement can be verified and, further, the more probable that the rating may be characterized as "wholly false and clearly damaging."(272) Another consideration in this context might be the practical meaning of the demotion, which is a substantially increased financial burden for the corporation carrying the lower rating. The damage to the corporation is clear when the rating is lowered, higher interest rates and greater difficulty in securing financing, and it would be particularly damaging when the lowering of the rating falsely reflects the creditworthiness of the rated institution.
D. Conclusions as to Defamation in the United States
Once the power of rating agency utterances is appreciated, it is not difficult to understand corporate desire to influence rating agency publications in their favor--the predicament at GM makes a good example.(273) The defamation action presents a viable and, relative to a simple negligence claim, complex alternative for seeking relief from a negligent rating that has damaged a corporation. To pursue a claim for libel, the plaintiff must construct all three pillars: (1) publication of fact (2) about a private person (3) on a matter of private concern. A rating is most persuasively categorized as a fact when there has been a dramatic downgrading of the rating so that the downgrading implies potential bankruptcy or poor financial health. Companies are most easily portrayed as private individuals where they are not seeking public attention, as they would be in a securities offering, and are simply the subject of an unsolicited rating by the rater. Ratings arguably are private-concern expressions where wholly false, clearly damaging to the company rated, and issued in the individual interest of the rating agency and its specific business audience.
IV. SUMMARY AND PERSPECTIVE
In England, rating agencies owe a duty of care for their communications and publications to parties whose reliance upon such communications is foreseeable, who have sufficient proximity with the rating agency, and on whose behalf it is reasonable and just to extend such a duty.(274) Though English courts have yet to deal directly with rating agency duty of care, parties to which a duty of care may be extended under the presented duty of care analysis are: shareholders of a company where there is a contract between company and rating agency but no contract between shareholders and rating agency; and a rated company which is rated on the basis of a contract between a rater and an investor.(275)
In the United States, courts have spoken in two separate cases. In the first, investors relied upon a negligent misstatement in the terms of a securities offering in an agency's publication.(276) The second involved reliance by an investor upon a rating agency's incorrectly high rating of a company's commercial paper.(277) In the first instance, the court refused to extend liability to a rating agency for its misstatement of the terms of a security offering in its regular publication without some type of privity beyond a simple subscription agreement and where the plaintiff could have referred to the original prospectae for the correct description.(278) In the second, the court found the rating was not a negligent one in the face of arguably oversimplified accounting methods used and the agency's failure to place emphasis on important financial information, such as company losses in the hundreds of millions.(279)
The analyses of the law in England and the United States show the root similarity between these two common law systems in their duty of care liability. A divergence in the affinity of the systems occurs at the point of American securities legislation which creates liabilities beyond the common law. Because of the basic similarity, it would not be unreasonable to predict that a duty of care formulation in one jurisdiction will find acceptance in the other. Applicability of a potential English duty of care to an American jurisdiction may be particularly attractive where a rating is contracted for by a corporate raider and the rating negligently underrates the targeted corporation making it vulnerable to takeover at a price lower than its true value. The incorrectly low rating would be powerful ammunition in the hands of a corporate purchaser to persuade shareholders new management is required. The landscape of liability in Germany is less kind to rating agencies than those of England and the United States.(280) Although a contract is generally required between the parties before liability is extended, a subscription agreement is considered sufficient privity to establish liability, a concept expressly rejected in at least one U.S. Circuit and presumably insufficient for the purposes of establishing proximity in the English analysis. Where there is no contract, subscription or other agreement between rater and investor, but there is a contract between rater and rated company, an investor in Germany may rely upon that contract to base its claim.(281) This application appears to go further than American courts are willing to venture in applying liability for reliance upon a negligent rating, but it creates possible avenues of attack for shareholders in England, in light of decisions on duty of care.
When comparing the defamation laws of England and the United States, the constitutionally-generated, actual malice burden of proof in the United States for cases of libel or slander involving the expression of opinion, public individuals or matters of public concern is something of a radical break from the English common law defamation analysis with its defenses, among others, of privilege and fair comment.(282) The common law analysis for defamation in England and the United States were quite comparable until the landmark Sullivan decision, which extended First Amendment protection for defendants in certain cases of defamation.(283)
Henceforward, defamation plaintiffs in the United States have shouldered a more complex and difficult burden than their English counterparts. Nevertheless, it is still practicable to maintain a libel action against a rating agency under the far less cumbersome negligence standard in American jurisdictions by contending: (1) a rating is an expression of fact; (2) the injured party is a private individual; and (3) the rating was an expression on a matter of private concern. When a plaintiff fails to maintain only one of the three pillars upon which the negligence burden in an action for defamation rests, it must then prove actual malice on the defendant's part. The most difficult proposition for the plaintiff in this action appears to be convincing the court that a rating is an expression of fact and not opinion. (1.) There are approximately 36 rating agencies worldwide. Those countries and territories that host at least one domestic rating agency are Australia, Canada, Chile, Cyprus, England, France, Germany, Hong Kong, India, Japan, South Korea, the Philippines, Portugal, and the United States. (2.) See, e.g., Mallinckrodt Chemical Works v. Goldman, Sachs & Co., 420 F. Supp. 231 (S.D.N.Y. 1976). (3.) The European Economic Area, or EEA, is the result of an agreement between the twelve European Community member states and six prospective members--Austria, Finland, Liechtenstein, Norway, Sweden, and Switzerland--which allows the aforementioned nations to participate in the borderless market and is seen as a necessary precursor to full membership within the European Commun As of December 1992, all but Switzerland had ratified the EEA agreement. The European Community Common Market became effective at midnight on January 1, 1993. (4.) On the immediate horizon, a development with meaningful repercussions for both the ratings consumer and rating agencies themselves is the advent of a pan-European rating agency. See, e.g., Oliver Everling, Credit Rating durch internationale Agenturen: Eine Untersuchung zu den Komponenten und instrumentalen Funktionen des Rating 74-77 (1991); Oliver Everling, Ratingagenturen weltweit, Die Bank, Mar. 1991, at 151.
France's Euronotation and England's International Banking Credit Analysis (IBCA) have recently merged to form Europe's largest competitor to the American-based ratings giants. See Natalie Maynes, Agencies in Ratings Battle of Europe, Corp. Fin., Oct. 1992, at 37.
Both Standard & Poor's and Moody's operate offices in London and Paris as well as other financial centers. A subsidiary of S&P's, Insurance Insolvency of America, Inc. operates offices in London and Hartford, Connecticut. Another S&P subsidiary, Agence d'Evaluation Financiere, S.A., maintains its base in Paris. IBCA maintains offices in London, Sao Paulo, New York, Tokyo, and Melbourne. Id. at 38. (5.) In the near future, an additional merger is planned between Euronotation, IBCA, and Germany's Projektgesellschaft Rating. See Richard Waters, Plea for Single European Credit Rating Agency, Fin. Times, (London) Nov. 20, 1992, at 29. (6.) Standard & Poor's, Corporate Finance Criteria 3 (Frank Rizzo et al. eds., 1991) [hereinafter Corporate Finance Criteria]. (7.) Id. (8.) See infra subpart I.B. (9.) Corporate Finance Criteria, Supra note 6, at 3. (10.) Id. at 7, 57; see also Moody's Investor Service, 5 Moody's Global Ratings 2 (1992). (11.) See generally Helen M. Fielder, The Not So Tender Trap: Liability For Investment Advice L. Inst. J., Jan./Feb. 1985, at 42. (12.) Corporate Finance Criteria, supra note 6, at 4. (13.) Id. (14.) "For example, one large company faced a downgrade of its |A-1' commercial paper rating owing to a growing component of short-term, floating-rate debt. To keep its rating, the company chos to restructure its debt maturity schedule in a way consistent with S&P's view of what was prudent." Id. (15.) Id. (16.) Loi [N.sup.o] 91-715 du 26 juillet 1991 [Law[No.sup.o]. 91-715 of July 26, 1991 ], Journal Off de la Republique Francaise [J.O.], July 27, 1991, at 9952. (17.) Decret [No.sup.o] 92-137 du 13 fevrier 1992 [Decree [No.sup.o]. 92-137 of Feb. 13, 1992], art. Feb. 14, 1992, at 2374 [hereinafter Decree No. 92-137 of Feb. 13, 1992]. (18.) Id. art. 3; see also Arrete du 13 mars 1992 (Order of Mar. 13, 1992]], J.O., Mar. 14, 1992, at 3684 [hereinafter Order of Mar. 13, 1992] (list of raters approved by Finance Minister Pierre Beregovoy). (19.) Decree No. 92-137, art. 6. (20.) Id. (21.) Order of Mar. 13, 1992. (22.) For an in-depth discussion of agency liability in Germany, see Carsten Thomas Ebenroth & Thomas Daum, Die rechtlichen Aspekte des Ratings von Emittenten und Emissionen, 43 (1992) [hereinafter Die rechtlichen Aspekte].
For a brief overview of publication liability in United States, United Kingdom, and Germany, see Johannes Gross, Gegendarstellung, Capital, Sept. 1992, at 3. (23.) Die rechtlichen Aspekte, supra note 22, at 8, 11-12; Judgment of Feb. 8, 1978, Bundesgerichtsh [BGH], 31 Neue Juristische Wochenschrift [N.J.W.] 997 (F.R.G.); Judgment ofJune 10, 1976, BGH, 67 Entscheidungen des Bundesgerichtshofes in Zivilsachen [BGHZ] 1, 5 (F.R.G.); Judgment of Mar. 14, 1973, BGH, 26 N.J.W. 843, 845 (F.R.G.); Carl Soergel, 3 Munchener Kommentar zum Burgerlichen Gesetzbuch [section] 635 (1988).
See generally Elizabeth Lang, Die Haftung fur Fehler in Druckwerken (1982); Klaus F. Rohl, Fehler in Druchwerken, 34 Juristenzeitung 369 (1979). (24.) Die rechtlichen Aspekte, supra note 22, at 11-12. (25.) See Judgment of Feb. 10, 1930, Reichsgericht [RG], 127 Entscheidungen des Reichsgerichts in Zivilsachen [RGZ] 218, 222 (Germany); Judgment of Nov. 2, 1983, BGH, 37 N.J.W. 355 (F.R.G.); Judgment of June 15, 1971, BGH, 56 BGHZ 269, 273 (F.R.G.); Judgment of Nov. 26, 1968, BGH, 51 BGHZ 91, 96 (F.R.G.); Arno Lang, Zur Dritthaftung der Wirtschaftsprufer, 42 Die Wirtschaftsprufung 57, 62 (1989). (26.) Judgment of Sept. 17, 1985, BGH, 39 N.J.W. 180, 181 (F.R.G.); Judgment of Oct. 1 1, 1988, BGH, 42 N.J.W. 1029 (F.R.G.); Judgment of May 31, 1990, Landgericht (LG) in Monchengladbach, 44 N.J.W. 415 (F.R.G.). (27.) See infra subpart II.A.1. (28.) See infra subpart II.A.2. (29.) See infra subpart II.A.3. (30.) See infra subpart II.A.4. (31.) First Equity Corp. v. Standard and Poor's Corp., 869 F.2d 175 (2d Cir. 1989) [First Equity III]; Mallinckrodt Chemical Works v. Goldman, Sachs & Co., 420 F. Supp. 231 (S.D.N.Y. 1976). (32.) See Hedley Byrne & Co. v. Heller & Partners, 1964 App. Cas. 465 (appeal taken from C.A.); 1 Chitty on Contracts [section] 445 (Anthony G. Guest ed., 26th ed. 1989). (33.) 1964 App. Cas. 465. In Hedley Byrne, a bank that supplied a reference for a customer was held to owe a duty of care to a stranger who relied on the reference. The bank ultimately avoided liability because the bank had expressly disclaimed liability in the reference. (34.) Id. at 466-69. (35.) Id. at 486 (by Lord Reid), 502-03 (by Lord Morris of Borth-y-Gest), 514 (by Lord Hodson), and 528-29 (by Lord Devlin). (36.) Id. at 533; see also Caparo Industries v. Dickman,  1 Q.B. 653, 668-69 (C.A. 1988). (37.) Id. at 482; see also Caparo Industries,  1 Q.B. at 669; Yuen Kun Yeu v. Attorney-General of Hong Kong,  1 App. Cas. 175, 191-92 (P.C. 1987) (appeal taken from Hong Kong). (38.) Twomax Ltd. v. Dickson, McFarlane & Robinson, 1983 S.L.T. 98, 103. (39.) See, e.g., Caparo Industries,  1 Q.B. at 678; Mariola Marine Corp. v. Lloyd's Register of Shipping ("The Morning Watch"),  1 Lloyd's Rep. 547, 557 (Q.B.). (40.) Caparo Industries,  1 Q.B. at 678; Hill v. Chief Constable of W. Yorkshire,  1 App. Cas. 53, 60 (1988) (appeal taken from C.A.); Yuen Kun Yeu,  1 App. Cas. at 192. (41.) Donoghue v. Stevenson, 1932 App. Cas. 562, 581 (appeal taken from Scot.) (by Lord Atkin). (42.) Hedley Byrne, 1964 App. Cas. at 486 (by Lord Reid). (43.) Junior Books Ltd. v. Veitchi Co., 1983 App. Cas. 520, 533 (appeal taken from Scot.) (by Lord Fraser of Tullybelton); Hedley Byrne, 1964 App. Cas. at 529 (by Lord Devlin). (44.) Greater Nottingham Co-operative Society Ltd. v. Cementation Piling and Foundations Ltd.,  1 Q.B. 71, 108 (C.A. 1988); Yuen Kun Yeu, [1988) 1 App. Cas. at 196; Smith v. Bush,  1 App. Cas. 831, 847 (1989) (appeal taken from C.A.); Simaan General Contracting Co. v. Pilkington Glass Ltd. (No. 2),  1 Q.B. 758, 784-85 (C.A.); Curran v. Northern Ireland Co-ownership Housing Ass'n Ltd.,  1 App. Cas. 718 (appeal taken from N. Ir.); Muirhead v. Industrial Tank Specialties Ltd., [1986) 1 Q,B. 507, 528 (C.A. 1985). (45.) Caparo Industries v. Dickman,  1 Q.B. 653, 679 (C.A. 1988) (by Lord Bingham). As to the interplay of foreseeability with proximity, Lord Bingham wrote: "the more obvious it is that act or omission will cause harm to B, the less likely the court will be to hold that the relationshi and B is insufficiently proximate to give rise to a duty of care." Id. (46.) Governors of the Peabody Donation Fund v. Sir Lindsay Parkinson & Co.,  1 App. Cas. 210, 241 (appeal taken from C.A.) (by Lord Keith of Kinkel). The requirement is well described by New Jersey Chief Justice Weintraub: "Whether a duty exists is ultimately a question of fairness. The inquiry involves a weighing of the relationship of the par the nature of the risk, and the public interest in the proposed solution." Goldberg v. Housing Auth. the City of Newark, 186 A.2d 291, 293 (N.J. 1962), cited with approval in Caparo Industries,  1 Q.B. at 680. (47.) See generally McLoughlin v. O'Brian,  App. Cas. 410 (appeal taken from C.A.). (48.)  1 App. Cas. 831 (1989) (appeal taken from C.A.). (49.) Id. at 848. (50.) Id. at 840-42. (51.) Id. at 842-43. (52.) Id. at 847. (53.) Such a disclaimer must satisfy the requirements of [section] 11(3) of the Act. The surveyor wa professional, by the Act's definition, who was required to provide a copy of the contract to the pur before the surveyor could rely upon the disclaimer within it. Because the surveyor failed to supply such a copy, it was determined by the court that to apply the disclaimer as to the purchaser would not be "fair and reasonable" as used in the Act. See Unfair Contract Terms Act, 1977, [subsect 11(3) (Eng.). (54.) Smith,  1 App. Cas. at 847. (55.) Robert Grime, Shipping Law 75 (2nd ed. 1991). (56.)  1 Lloyd's Rep. 547 (Q.B.). (57.) Id. at 549-55. (58.) Id. at 557. (59.) Id. at 560-62. (60.) Id. at 561. (61.) Id. at 560; see also Smith,  1 App. Cas. at 864-65 (by Lord Griffiths). (62.) 1977 App. Cas. 405 (1975) (appeal taken from C.A.). (63.) Id. at 415. (64.) Id. at 412-13; see Arbitration Act, 1950, 14 Geo. 6, ch. 27 (Eng.) (granting immunity from negligence claims to "quasi arbitrators"). (65.) Arenson, 1977 App. Cas. at 426 (by Lord Wheatley). (66.) Id. at 438. (67.) Id. at 438-39. (68.) See infra subpart II.C.1; cf. First Equity Corp. of Florida v. Standard & Poor's Corp., 670 F. Supp. 115 (S.D.N.Y. 1987) [First Equity I] (publisher of Corporate Records held not liable to investors who claimed to have relied on erroneous description of convertible bonds); Gale v. Value Line, Inc., 640 F. Supp. 967 (D.R.I. 1986) (publisher of Value Line held not liable to subscriber wh purchased warrants based upon an incomplete description of same where the publication recommended against purchase); Gutter v. Dow Jones, Inc., 490 N.E.2d 898 (Ohio 1986) (publisher of Wall Street journal held not liable to a subscriber who relied upon non-defamatory negligent misrepr in making an investment decision). (69.) Companies Act, 1985, [section] 384 (Eng.). Auditors must be appointed at the general meeting a which accounts are laid and serve until the next general meeting at which accounts are laid. Id. [se An exception to the auditor requirement is contained in section 388A for dormant companies as define by section 250. See id. [subsection] 250, 388A. (70.) Id. [section] 237. (71.) Id. [section] 389A. (72.) The Companies Act, 1989, [subsection] 30-34 (Eng.). (73.)  1 Q.B. 653 (C.A. 1988). (74.) The Companies Act, 1985, [subsection] 236-237. (75.) Caparo Industries,  1 Q.B. at 657-64. (76.) Id. at 683-85. (77.) Id. at 685. (78.) Id. at 687. (79.) Id. at 689. (80.) Id. at 689-90. (81.) Id. at 690-91, (82.) Id. at 692. (83.) Id. at 680. (84.) Id. at 685. (85.) Id. (86.) Id. at 689. (87.) Ultramares Corp. v. Touche, Niven & Co., 174 N.E. 441, 444 (N.Y. 1931); see also Courteen Seed Co. v. Hong Kong & Shanghai Banking Corp., 157 N.E. 272, 273 (N.Y. 1927). (88.) See Caparo Industries,  1 Q.B. at 680. (89.) Id. at 685. (90.) Cf. id. at 689. (91.) Smith,  1 App. Cas. 831, 859 (1989) (appeal taken from C.A.). (92.) See Unfair Contract Terms Act, 1977, [subsection] 2(2), 11(3) (Eng.). (93.) See supra subpart II.B.1. (94.) Caparo Industries,  1 Q.B. 653, 672-73 (C.A. 1988). (95.) Id. (96.) See "The Morning Watch",  1 Lloyd's Rep. 547, 560 (Q.B.); see also Smith,  1 App. Cas. 831, 865 (1989) (appeal taken from C.A.) (by Lord Criffith). (97.) See Hedley Byrne & Co. v. Heller & Partners, 1964 App. Cas. 465, 482 (ppeal taken from C.A.) (by Lord Reid). Lord Reid declines to determine the necessary degree of proximity before finding a duty of care in a case of negligent misrepresentation, albeit made directly from defendant plaintiff. (98.) C Caparo Industries,  1 Q.B. at 684-85; "The Morning Watch",  1 Lloyd's Rep. at 557-58. (99.) 869 F.2d 175 (2d Cir. 1989) [First Equity III). At the District Court level, Judge Goettel granted summary judgment in favor of defendant Standard & Poor's on all issues except where First Equity alleged actual knowledge by Standard & Poor's of the falsity of the publication, holding that Florida state law immunized disseminators of financial information from tort liability for non-defam negligent misstatements. First Equity Corp. v. Standard & Poor's Corp., 670 F. Supp. 115, 117-19 (S.D.N.Y. 1987) [First Equity I]. In ruling on the remaining issue of actual knowledge in a later procceding, Judge Mukasey departed from tort law analysis and held that the high degree of scienter required by Judge Goettel was consistent with well-established First Amendment principles requiring plaintiffs to demonstrate actual malice. First Equity Corp. v. Standard & Poor's Corp., 69 F. Supp. 256, 258-59 (S.D.N.Y. 1988) [First Equity II]. Erroneously employing the First Amendment analysis for media defendants in cases of defamation, as established in New York Times Co. v. Sullivan, 376 U.S. 254 (1964), Judge Mukasey held that First Equity was required to demonstrate that Standard & Poor's had published the false summary "either . . . with actual knowledge of its falsity or reckless disregard of its truth or falsity," First Equity II, 690 F. Supp. at 259. In ord show reckless disregard, Mukasey wrote, "|[t]here must be sufficient evidence to permit the conclusi that the defendant in fact entertained serious doubts as to the truth of his publication.' " Id. at 259 (quoting St. Amant v. Thompson, 390 U.S. 727, 731 (1968)). (100.) First Equity III, 869 F.2d at 176-77. (101.) Id. at 177-78. (102.) Id. at 178. (103.) See Jalliet v. Cashman, 189 N.Y.S. 743 (Sup. Ct. 1921), aff'd, 194 N.Y.S. 947 (App. Div. 1922), aff'd 139 N.E. 714 (N.Y. 1923). Jalliet involved an investor who relied on a false report fro a stock ticker machine in making an investment decision. The court analogized the stock ticker with newspaper, holding that granting recovery would expose the stock ticker service to liability from th entire public at large. In the absence of privity of contract or fraud amounting to deceit, libel, o slander, the court refused to grant recovery. (104.) To prove fraud in Florida, a plaintiff must prove: (a) knowledge of the representor of the misrepresentation; or (b) representations made by the representor without knowledge as to either truth or falsity; or (c) representations made under circumstances in which the representor ought to have known, if he did not know, of the falsity thereof. Kutner v. Kalish, 173 So.2d 763, 765 (Fla. Dist. Ct. App.), cert. denied, 183 So.2d 210 (Fla. 1965). Declining to apply the third formulation above, the court found that Florida would follow the rule handed down in Jalliet, even though it had not expressly adopted it. First Equity III, 869 F.2d at 180. (105.) First Equity III, 869 F.2d at 179. (106.) See First Equity I, 670 F. Supp. at 117; see also Gale v. Value Line, Inc., 640 F. Supp. 967 (D.R.I. 1986) (publisher of Value Line held not liable to subscriber who purchased warrants based upon an incomplete description of same where the publication recommended against purchase); Gutter v. Dow Jones, Inc., 490 N.E.2d 898 (Ohio 1986) (publisher of Wall Street Journal was held not liable to a subscriber who relied upon non-defamatory negligent misrepresentation in making an investment decision). (107.) Cf. Ultramares Corporation v. Touche, Niven & Co., 174 N.E. 441, 447 (N.Y. 1931). (108.) First Equity III, 869 F.2d at 180. (109.) Id. at 179. (110.) Id. (111.) 420 F. Supp. 231 (S.D.N.Y. 1976) (court held where debt rating agency rated the outstanding commercial paper of large company, agency has no duty to investigate the information provided to them from a corporation upon which it makes its ratings at least when it does not represent that it has). (112.) Id. at 239. (113.) See infra, subpart II.C.3. (114.) Mallinckrodt, 420 F. Supp. at 244. (115.) Id. at 234. (116.) Id. at 234-35. (117.) Id. at 233. (118.) Id. at 241. (119.) Id. (120.) Though not explicitly expressed by Congress in creating Section 10(b) or by the SEC in creating Rule 10(b)-5, the existence of a private right of action under the broad anti-fraud princip of Section 10(b) and Rule 10(b)-5 is well established. See Blue Chip Stamps v. Manor Drug Stores, 421 U.S. 723 (1975); Superintendent of Insurance of the State of N.Y. v. Bankers Life & Casualty Co., 404 U.S. 6 (1971). The application of Section 10(b) to cases involving reliance upon the allege misleading ratings of a debt rating agency appears to have first developed in the Penn Central Trans Company litigation. See In re Penn Central Securities Litigation, 325 F. Supp. 309 (J.P.M.L. 1971). (121.) First Equity Corp. v. Standard & Poor's Corp. 869 F.2d 175, 179 (2d Cir. 1989) (First Equity III]. Although the court found that the misstatements in the agency's publication involving t terms of a corporate convertible indenture were arguably negligent and may have caused the plaintiff to suffer loss, the court found that the agency was not liable under a theory of negligent misrepres Id. at 179-80. The court refused to extend liability considering that the publication was distribute to a wide public, the class of potential plaintiffs was multitudinous, the most careful preparation would not avoid some errors in the publication, and the users of such publications were in the best position to determine their accuracy and could easily protect themselves from misstatements and inaccuracies by examining the original documents or federally required prospectuses. Id. at 180. (122.) Mallinckrodt Chemical Works v. Goldman, Sachs & Co., 420 F. Supp. 231, 241 (S.D.N.Y. 1976). (123.) Ernst & Ernst v. Hochfelder, 425 U.S. 185 (1976) (an action for civil damages under Section 10(b) and Rule 10b-5 could not be maintained in the absence of an allegation of the defendan intent to deceive, manipulate, or defraud). The plaintiffs in Ernst & Ernst fell prey to a fraudulen securities scheme perpetrated by the president of the brokerage firm from which they had purchased securities. Id. at 189. The Supreme Court rejected the plaintiffs' theory of negligence and duty to investigate. Instead the Court required a more substantial involvement by the accounting agency i the underlying fraud itself in the form of some level of scienter, for example, an intent to deceive manipulate, or defraud, and not simply negligent misconduct alone. Id. at 212-14. (124.) Cf. In re Republic Nat'l Life Ins. Co., 387 F. Supp. 902, 905 (S.D.N.Y. 1975). (125.) Cf. Zachman v. Erwin, 186 F. Supp. 691 (S.D. Tex. 1960). (126.) See Thomas L. Hazen, The Law of Securities Regulation [section] 13.4 (2d ed. 1990). The scienter requirement of the Securities and Exchange Commission's Rule 10b-5, as established in Cohen v. Franchard Corp., 478 F.2d 115 (2d Cir.), cert. denied, 414 U.S. 857 (1973) is:
[W]hether the plaintiff has established that the defendant either knew the material facts
that were misstated or omitted and should have realized their significance or failed or
refused to ascertain and disclose such facts when they were readily available to him and he
had reasonable grounds to believe that they existed. Id. at 123. The Cohen court rejected the argument that promoters of a syndication had a duty to investigate the offeror of securities and any other matters affecting the investment value of securi stating that plaintiffs were attempting to establish a standard of mere negligence in allowing disse of allegedly false and misleading offering materials as well as a duty to investigate on the part of promoters of securities. Thus, without requisite knowledge on the part of the promoters that the material facts of the securities offering were misstated or omitted, and where the court does not de that the promoters "should have realized" the significance of those facts, or that the promotor had failed or refused to ascertain and disclose such facts when they were readily available to him, furthermore, where the promotor had reasonable grounds to believe that such facts existed, promoters of securities cannot be held liable for misstatement. Id. at 123-24. (127.) Cohen, 478 F.2d at 123. (128.) There are three basic categories of privileged communication. First, there is justification, more commonly, the defense of truth. Where the alleged defamatory communication is true, the plainti action for defamation damages generally fails. Clerk & Lindsell on Torts [section] 21-60 (Reginald W.M. Dias ed., 16th ed. 1989) [hereinafter Clerk & Lindsell on Torts]. Second, there is absolute privilege extended to judicial, parliamentary, and official proceedings. Id. [section] 21-69; see al v. Lamb,  11 Q.B.D. 588 (C.A.). Finally, there is a qualified privilege that is only prima fac a ground of defense. Clerk & Lindsell on Torts, supra, [section] 21-68. (129.) Clerk & Lindsell on Torts, supra note 128, [section] 21-01. (130.) Clerk & Lindsell on Torts, supra note 128, [section] 21-02. Permanent forms of publication that qualify as libel, in addition to traditional forms such as the print media, are radio and telev transmissions, cable transmissions, and theatrical performances. See Defamation Act, 1952, 15 & 16 Geo. 6 & 1 Eliz. 2, chap. 66, [subsection] 1, 16 (Eng.); Cable and Broadcasting Act, 1984, [section] Theatres Act, 1985, [section] 57 (Eng.). (131.) South Hetton Coal Co. v. North-Eastern News Ass'n,  1 Q.B. 133, 147 (C.A. 1893). (132.) Clerk & Lindsell on Torts, supra note 128, [section] 21-18; see also Metropolitan Saloon Omnibus Co. v. Hawkins, 157 Eng. Rep. 769, 4 H. & N. 87 (Ex. D. 1859); Sungravure Property v. Middle East Airliban S.A.L., 134 C.L.R. 1 (1975) (Austl.) (defendant alleged that airline's planes were susceptible to hijacking). (133.) In their pleadings, plaintiffs must allege that the assertions published are false. Further they should, though it is not necessary, allege that the publication was malicious. Bromage v. Pross 107 Eng. Rep. 1051, 1054, 4 B. & C. 247, 255 (K.B. 1825); see The Queen v. Munslow,  1 Q.B. 758 (Cr. Cas. Res). The law assumes the prima facie falsity of the statement. Clerk & Lindsell on Torts, supra note 128, [section] 21-03. "Malicious" is used in a technical sense and is presumed by the law from the fact of publication. Id.; see also Bromage v. Prosser, 107 Eng. Rep. at 1054; Clark v. Molyneux,  3 Q.B.D. 237, 247 (C.A.); Johnson v. Emerson, 25 L.T.R. 337, 342 (Ex. Ch. 1871). (134.) Broadway Approvals Ltd. v. Odhams Press Ltd.,  2 Q.B. 683; Winfield & Jolowicz on Tort 320-21 (William V. H. Rogers ed., 13th ed. 1989) [hereinafter Winfield & Jolowicz on Tort). To justify comment, the defendant must show beyond question that the comment is well founded based upon the proving of certain relevant facts. Clerk & Lindsell on Torts, supra note 128, [section] 21-63. (135.) Winfield & Jolowicz on Tort, supra note 134, at 320; Clerk & Lindsell on Torts, supra note 128, [section] 21-03. (136.) Winfield & Jolowicz on Tort, supra note 134, at 333-38. Communications between a solicitor and his client during the course of litigation are absolutely privileged. Beyond litigatio unclear how far the absolute privilege extends. (137.) Horrocks v. Lowe, 1975 App. Cas. 135, 149-50 (appeal taken from C.A.) (where there existed a finding that the defendant maintained "positive belief in the truth of what he said," a finding of malice, that is, spite or ill will, is inconsistent and the privilege stands); cf. Watt v  1 K.B. 130, 154 (C.A. 1929), (138.) Wright v. Woodgate, 150 Eng. Rep. 244, 246, 2 Cr. M. & R. 573, 578 (Ex. D. 1835); Clerk & Lindsell on Torts, supra note 128, [section] 21-81. (139.) Angel v. H.H. Bushell & Co.,  1 Q.B. 813 (1967). (140.) Lyman v. Gowing, 6 L.R.Ir. 259, 268-69 (1880). (141.)  2 K.B. 431 (C.A.). (142.) Id. at 460. (143.) Id. (144.) Id. (145.) Id. at 469. (146.) Id. at 463. (147.) Id. at 469; see also Star Gems v. Ford,  1 C.L. 134. (148.) Davis v. Snead,  5 Q.B. 603, 611; see Stuart v. Bell,  2 Q.B. 341, 351 (C.A.); Hunt v. Great Northern Ry.,  2 Q.B. 189 (C.A.). (149.) See Bromage v. Prosser, 107 Eng. Rep. 1051, 1051 4 B.&C. 247, 247 (K.B. 1825). Lord Scrutton, in Watt v. Longsdon,  1 K.B. 130 (C.A. 1929), wrote of the essentials of qualified privilege as being the following: "[T]he principle is that either there must be an interest in the r and a duty to communicate in the speaker, or an interest to be protected in the speaker and a duty to protect it in the recipient." Id. at 147. Lord Greer wrote in the same decision: "It may be, of course, that the interest of the person receiving the communication is of such a character as by its nature to create a social duty in another under the circumstances to make the communication that he in fact does make." Id. at 152. (150.) Clerk & Lindsell on Torts, supra note 128, [section] 21-92. (151.) 1908 App. Cas. 390 (P.C.) (appeal taken from Austl.) (152.) London Association for Protection of Trade v. Greenlands Ltd.,  2 App. Cas. 15 (appeal taken from C.A.). The case was also doubted in Watt v. Longsdon,  1 K.B. at 148. (153.) Report of the Faulks Committee on Defamation, 1975, Cmnd. 5909, para. 237. (154.) In contracts for the supplying of services, such as ratings, the supplier may seek to protect himself, his employees and his agents, against liability, for example, for negligence. Arguably, in commercial contracts where the parties are of relatively equal bargaining power, exclusion or exempt clauses absolving a party of a particular fault are valid. See 1 Chitty on Contracts, supra note 32, [section] 941. Problems will arise in the circumstance where the party imposing the exclusi liability is in an economically superior position, allowing him the opportunity to dictate his own t to the other. For an exemption clause to be effective it must be expressed clearly and without ambig Ailsa Craig Fishing Co., v. Malvern Fishing Co.,  1 W.L.R. 964, 966-70 (H.L. 1981); see also Photo Production Ltd. v. Securior Transport Ltd., 1980 App. Cas. 827, 850-51 (appeal taken from C.A.). Such clauses are construed strictly, and in any event will not be allowed where such a clause absolves a party from implied ordinary obligations accepted by parties entering into contract a similar kind. Suisse Atlantique Societe d'Armement Maritime S.A. v. N.V. Rotterdansche Kolen Centrale, 1967 App. Cas. 361, 402 (appeal taken from C.A.). Clauses which exempt a party from fulfilling aspects of the contract which by their lacking would frustrate the very purpose of the co are not valid exemption clauses. Id.
A consideration that has both advantages and disadvantages is that the validity of liability exclu clauses must be determined by the proper law of the contract, that is, the law of the forum chosen by the parties to govern the contract. In this case the law of the forum chosen by the partie was Germany. Coupland v. Arabian Gulf Oil Co.,  1 W.L.R. 1136, 1153 (C.A.); Coast Lines v. Hudig & Veder Chartering,  2 Q.B. 34, 35 (C.A. 1971); Sayers v. International Drilling Co.,  1 W.L.R. 1176, 1177 (C.A.); Jones v. Ocean Steam Navigation Co.,  2 Q.B. 730.
Certain conditions on the application of an expressly chosen proper law to govern the effect of exclusion clauses is provided by the Unfair Contract Terms Act 1977, [section] 27 (Eng.). These cond apply only where the parties choose English or Scottish law as the law of the contract. PETER K. Thompson, Unfair Conract Terms Act 1977, at 46 (1978). The advantage for the ERA contract is that the question of limited liability will be judged by German law. Here, however, lies the disadvantage, since British contract law is more liberal than its German counterpart, particularly o the question of exemption of liability, that is, whether the limitation of liability is for fault or specified limitation on damages. 1 Chitty on Contracts, supra note 32, [subsection] 946-47. Liabilit negligence may be excluded or restricted where the words of the exemption clause are sufficient to indicate that the parties intended to exclude such liability for one or both of the parties. A suffi clause must have a clear and unmistakable reference to negligence or to a synonym for it, and in the absence of such a specific reference, words such as "at sole risk," "at the customer's risk," or "at own risk" will normally be sufficient to sustain an exemption for liability of negligence. Spriggs v Sotheby Park Bernet & Co.,  1 Lloyd's Rep. 487 (C.A.); Clark v. Sir William Arrol & Co., 1974 S.L.T. 90, 92 (1973); Scottish Special Housing Assn. v. Wimpey Construction U.K. Ltd.,  1 W.L.R. 995 (H.L.); Rutter v. Palmer,  2 K.B. 87, 88 (C.A.); Levinson v. Patent Steam Carpet Cleaning Co.,  1 Q.B. 69, 70 (C.A. 1977).
Where the clause seeks to limit the amount payable to one of the parties for damages caused by negligence or other fault, the clause must clearly and unambiguously, when read as a whole, have such an effect. George Mitchell (Chesterhall) Ltd. v. Finney Lock Seeds Ltd.,  2 App. Cas. 803 (appeal taken from C.A.); Ailsa Craig Fishing Co. v. Malvern Fishing Co.,  1 W.L.R. at 966. (155.) London Artists Ltd. v. Littler,  2 W.L.R. 409, 410 (C.A. 1968). (156.) Chernesky v. Aramdale Publishers and King, 90 D.L.R.3d 321 (1978); London Artists Ltd.,  2 W.L.R. at 410; Jones v. Skelton,  1 W.L.R. 1362; Silkin v. Beaverbrook Newspape  1 W.L.R. 743, 746 (Q.B.). (157.) Clerk & Lindsell on Torts, supra note 128, [section] 21-69. (158.) Truth (N.Z.) Ltd. v. Avery, 1959 N.Z.L.R. 274. The relevant portions of The Defamation Act of 1952 state:
In an action for libel or slander in respect to words consisting partly of allegations of fact
and partly of expression of opinion, a defence of fair comment shall not fail by reason only
that the truth of every allegation of fact is not proved if the expression of opinion is fair
comment having regard to such of the facts alleged or referred to in the words complained
of as are proved. The Defamation Act, 1952, 15 & 16 Geo. 6 & 1 Eliz. 2, chap. 66, [section] 6 (Eng.). (159.) Id. [section] 5; Moore v. News of the World,  1 Q.B. 441, 442 (C.A. 1971). (160.) London Artists Ltd.,  2 W.L.R. at 410; Cunningham-Howie v. F.W. Dimbleby & Sons,  1 K.B. 360, 362 (C.A. 1950). (161.) South Hetton Coal Co. v. North-Eastern News Ass'n,  1 Q.B. 133, 134 (C.A. 1893). The report that four of the stars of a successful play would leave the company was considered fair comment because it was a matter of public interest. London Artists Ltd.,  2 W.L.R. at 418 (citing with approval South Hetton Coal Co.,  1 Q.B. at 133.). (162.) See Watt v. Longsdon,  1 K.B. 130, 139-49 (C.A. 1929); Bromage v. Prosser, 107 Eng. Rep. 1051, 4 B.&C. 247 (K.B. 1825). (163.) See supra subpart I.A. It has been submitted that ratings may be classified as the expression of fact rather than opinion. (164.) London Artists Ltd.,  2 W.L.R. at 417 (by Lord Denning). (165.) Id. at 418. (166.) Cunningham-Howie,  1 K.B. 360, 364 (C.A. 1950). (167.) London Artists Ltd.,  2 W.L.R. at 419. (168.) Id.; South Hetton Coal Co. v. North-Eastern News Ass'n,  1 Q.B. 133, 135 (C.A. 1893). (169.) London Artists Ltd.,  2 W.L.R. at 419-20. (170.) Clerk & Lindsell on Tort, supra note 128, [section] 21-18; Sungravure Property v. Middle East Airliban S.A.L., 134 C.L.R.I. (Austl.) (1975); South Hetton Coal Co.,  1 Q.B. at 135. A rating can impugn insolvency and certainly relate to the business of a company and when false is actionable defamation. See supra subpart III.A. for a discussion of defenses to defamation under English law. (171.) Corporate Finance Criteria, supra note 6, at 7. (172.) U.S. Const. amend. I. "Congress shall make no law respecting an establishment of religion, or prohibiting the free exercise thereof; or abridging the freedom of speech, or the press; or the right of the people peaceably to assemble, and to petition the government for a redress of grievance Id. (173.) Corporate Finance Criteria, supra note 6, at 3. "As a part of the media [Standard & Poor's] simply has a right to express its opinion in the form of letter symbols." Id. (174.) 376 U.S. 254 (1964) (state defamation law allowing recovery for less than a showing of actual malice for libelous publication concerning public official's reputation found unconstitutiona where freedom of expression upon a public question is concerned). (175.) Gertz v. Robert Welch, Inc., 418 U.S. 323 (1974) (actual malice standard applied as well to private individuals where libelous speech concerns a public issue). (176.) New York Times v. Sullivan, 376 U.S. 254, 279-80 (1964). (177.) Id. at 270. (178.) Id. at 283. (179.) Id. at 254; see Dun & Bradstreet v. Greenmoss Builders, 472 U.S. 749, 754 (1985). (180.) Sullivan, 376 U.S. at 285-86. (181.) Dun & Bradstreet, 472 U.S. at 762-63. (182.) Corporate Finance Criteria, Supra note 6, preface. In determining a rating, both quantitative and qualitative analyses are employed. The judgement is qualitative in nature and the role of the quantitative analysis is to help make the best possible overall qualitative judgement be ultimately, a rating is an opinion. Id. (183.) Compare Ballentine's Law Dictionary 449 (3rd ed. 1969) (defining "fact" as "deed; an act; that which exists; that which is real; that which is true, an actuality; that which took pla that which might or might not have occurred") (citing Churchill v. Meade, 182 P. 368 (Or. 1919)); id. at 893 (defining opinion as "[a]n inference or conclusion of fact which a person has drawn from facts which he has observed" (citing Lipscomb v. State, 23 So. 210 (Miss. 1898)) and "a belief rathe than a representation of fact.") with 2 Words And Phrases Legally Defined 214 (John B. Saunders ed., 2d ed. 1969) ("It would be contrary to the policy of the [law of evidence] to give a restricted meaning to the word |fact' so as to exclude a statement of opinion by an expert."); Webster's New Universal Unbridged Dictionary 656 (2d ed. 1992) ([F]act . . . that which is done, deed . . . something declared to have happened; or to have existed . . . in law, something that has taken place either actually or by supposition, distinguished from purely legal result."). (184.) 1 Wigmore On Evidence 2 (3rd ed. 1940). (185.) Gertz v. Robert Welch, Inc., 418 U.S. 323, 339 (1974); Ollman v. Evans, 750 F.2d 970 (D.C. Cir. 1984), cert. denied, 471 U.S. 1127 (1985) (professor failed to prove actual malice standa to political columnists writing that the professor had "no status" within the academic community). (186.) 418 U.S. 323 (1974). (187.) Gertz, 418 U.S. at 339-40 (quoting New York Times v. Sullivan, 376 U.S. 254, 270 (1964)). (188.) Ollman v. Evans, 750 F.2d at 975. (189.) Shiver v. Apalachee Publishing Co., 425 So. 2d 1173 (Fla. Dist. Ct. App. 1983) (deciding that the difference between fact and opinion is simply a judgment call); Hotchner v. Castillon-Puche 551 F.2d 910, 913 (2d Cir.), cert. denied sub. nom. Hotchner v. Doubleday & Co., 434 U.S. 834 (1977) (creating a single-factor verifiability test); Information Control Corp. v. Genesis One Compu Corp., 611 F. 2d 781 (9th Cir. 1980) (adopting a multi-factor test looking at the totality of the circumstances surrounding the allegedly defamatory statement). (190.) 750 F.2d at 970 (D.C. Cir. 1984), cert. denied, 471 U.S. 1127 (1985). (191.) Id. at 979. Justice Scalia, then a D.C. Circuit judge, dissented from the opinion but joined with Circuit Judges Wald and Edwards, agreeing with the majority in the test that it was "the appropriate strategy for identifying absolutely privileged opinion . . . ." Id. at 1032. Scalia woul applied the test to find at least some parts of the publication in question to have been expression fact rather than opinion and therefore not protected by the actual malice and clear and convincing evidence standards because the statements were not on a matter of public concern nor were they about a public figure. Id. at 1036-39. (192.) Id. at 979. (193.) Id. at 979-84. (194.) Id. at 980. (195.) Id. at 981. (196.) Id. (197.) 539 F.2d 882 (2d Cir. 1976), cert. denied, 429 U.S. 1062 (1977). (198.) Olman v. Evans, 750 F.2d 970, 980 (D.C. Cir. 1984) (quoting Buckley v. Littell, 539 F.2d at 895). (199.) Moody's Cuts Ratings on GM Securities, Savannah Morning News, Nov. 25, 1992, at 48. "It was the threat of a securities downgrade [by rating agencies] just a year ago that triggered revolt of GM's outside directors, which led to a purge of the company's top management team and forced the restructuring and downsizing of GM's entire domestic car making operation." Id. (200.) Ollman, 750 F.2d at 981. (201.) Id. (202.) Cited as an example is the instance of a television sports reporter who was described as being enrolled in a course for "remedial speaking" which was taken to be an expression of opinion rather than a statement of fact. Ollman, 750 F.2d at 582 (citing Myers v. Boston Magazine Co., 403 N.E.2d 376 (1980)). The court based its holding upon a closer look at the entire article which conta the statement concerning a hockey player described as looking "like a gargoyle," at which point the "average reader would have been put on notice that he was reading opinions, and not being showered with facts." Id. at 982. (203.) The court holds suspect this particular consideration, concluding that there is the opportuni for abuse and stating that "there is authority against giving weight to cautionary or interrogatory language." Id. at 983. (204.) Id. at 983-84. (205.) Old Dominion Branch No. 496, Nat. Ass'n of Letter Carriers v. Austin, 418 U.S. 264, 268 (1974). (206.) Loeb v. Globe Newspaper Co., 489 F. Supp. 481, 486 (D. Mass. 1980). (207.) Corporate Finance Criteria, supra note 6, at 1-6. (208.) See part I.A. (209.) Nationally recognized statistical rating organizations or "NRSROs"
are discussed at 17 C.F.R. [section] 240.15c3-1(c)(2)(vi)(F) (1992) and 17 C.F.R. [section] 230.436(g) (1992). Under the "statistical rating organizations," or rating agencies, are exempted from the liabilities attendant to the registration statement as used under [subsection] 7 and 11 of the Securities and Exchange Act Id. (210.) In Dun & Bradstreet, Justice Powell wrote of Sullivan in an opinion joined by both justices Rehnquist and O'Connor, that:
[The] case concerned a public official's recovery of damages for the publication of an advertiseme
criticizing police conduct in a civil rights demonstration. As the Court noted, the
advertisement concerned "one of the major public issues of our time." Noting that "freedom
of expression upon public questions is secured by the First Amendment," and that
"debate on public issues should be uninhibited, robust, and wide-open," the Court held
that a public official cannot recover damages for defamatory falsehood unless he proves that
the false statement was made with "|actual malice'--that is, with knowledge that it was
false or with reckless disregard of whether it was false or not." (emphasis in the original)
(citations omitted). Dun & Bradstreet v. Greenmoss Builders, 472 U.S. 749, 755 (1985). (211.) Id. at 755 (citing Curtis Publishing Co. v. Butts, 388 U.S. 130 (1967)). (212.) 403 U.S. 29 (1971). (213.) Dun & Bradstreet, 472 U.S. at 755 (citing Rosenbloom, 403 U.S. at 441). (214.) Gertz v. Robert Welch, Inc., 418 U.S. 323, 343-44 (1974). (215.) Id. at 325. (216.) Id. at 326. (217.) Id. (218.) Id. at 325-26. (219.) Id. at 347. (220.) Id. at 343. (221.) Id. (222.) Id. (223.) Dun & Bradstreet v. Greenmoss Builders, Inc., 479 U.S. 749, 756 (1985). (224.) Id. (quoting Gertz, 418 U.S. at 348-49). (225.) Gertz, 418 U.S. at 349-52. (226.) Id.; see also Dun & Bradstreet, 479 U.S. at 757-62. (227.) Martin Marietta v. Evening Star Newspaper, 417 F. Supp. 947 (D.D.C. 1976), (228.) Id. at 955. (229.) Id. at 956. (230.) 425 F. Supp. 814 (N.D. Cal. 1977) (231.) Id. at 819. (232.) Gertz v. Robert Welch, Inc., 418 U.S. 323, 351 (1974). (233.) Id. (234.) See supra subpart I.A. (235.) See supra subpart III.C.I.c. (236.) Dun & Bradstreet v. Greenmoss Builders, Inc., 479 U.S. 749, 763 (1985). (237.) Gertz v. Robert Welch, Inc., 418 U.S. 323, 349 (1974). The Court held that the First Amendment prohibited awards of presumed and punitive damages to private plaintiffs from a publisher of false and defamatory statements on a matter of public concern unless the plaintiff shows actual malice. Id. at 351. (238.) Id. at 348. (239.) See Rosenblatt v. Baer, 383 U.S. 75, 92 (1966) (J. Stewart, concurring). (240.) Dun & Bradstreet, 479 U.S. at 759; Connick v. Myers, 461 U.S. 138, 145 (1983); NAACP v. Claiborne Hardware Co., 458 U.S. 886, 913 (1982); Carey v. Brown, 447 U.S. 455, 466-67 (1980); First National Bank of Boston v. Bellotti, 435 U.S. 765, 776 (1978); New York Times v. Sullivan, 376 U.S. 254, 269 (1964); Thornhill v. Alabama, 310 U.S. 88, 95 (1940). (241.) Dun & Bradstreet, 479 U.S. at 759-60; see also Connick, 461 U.S. at 146-47. (242.) Dun & Bradstreet at 759-60 (citing Harley Davidson Motorsports v. Markely, 568 P.2d 1359 (Or. 1977)). (243.) Roth v. United States, 354 U.S. 476, 484 (1957). (244.) Sullivan, 376 U.S. at 270. (245.) Garrison v. Louisiana, 379 U.S. 64, 74-75 (1964). (246.) Dun & Bradstreet, 472 U.S. at 760. (247.) Id. (quoting W. Page Keeton ET AL., Prosser and Keeton on the Law of Torts [section] 112 (4th ed. 1971)). (248.) See id. (249.) Id. at 757. The Supreme Court has added limitation to the liability of newspaper media defendants with respect to private figures. Where a newspaper publishes speech of public concern, a plaintiff which is a private figure must show that the statements at issue are false. See Philadelph Newspapers, Inc. v. Hepps, 475 U.S. 767, 776-77 (1985). (250.) Justices Rehnquist and O'Connor joined the majority opinion of Justice Powell, with concurrin opinions submitted by then Chief Justice Burger and Justice White. In their concurrences, Burger and White go further than the other three Justices in recommending the rejection of the Gertz decision and asking for a limiting of the Sullivan actual malice standard as to public officials. Id 763-74. (251.) Id. at 761. (252.) Id. at 756. (253.) Philadelphia Newspapers, 475 U.S. at 774 (referring to the corporate plaintiff in Dun & Bradstreet as a "private-figure"). (254.) Dun & Bradstreet, 472 U.S. at 761 (quoting Connick v. Myers, 461 U.S. 138, 146-47 (1983) (holding an employee's questionnaire as to fellow employee's confidence in supervisors as a matter of private concern)). (255.) Id. at 762. (256.) Id. (257.) The majority opinion cited cases integral to the formation and development of the commercial speech doctrine, including Virginia Pharmacy Bd. v. Virginia Citizens Consumer Council, 425 U.S. 748 (1976) and Central Hudson Gas & Elec. Corp. v. Public Service Comm'n of New York, 447 U.S. 557 (1980). Dun & Bradstreet, 472 U.S. at 762. The dissent suggested that the Justices' opinion subjected credit reporting to less stringent constitutional protection because they in fact determin to be commercial speech. Id. at 787. (258.) Dun & Bradstreet, 472 U.S. at 762-63. (259.) Id. at 763. In recognition of this fact, Justice White wrote: "[I]f protecting the press from intimidating damages liability that might lead to excessive timidity was the driving force behind [S and Gertz, it is evident that the Court engaged in severe overkill in both cases." Id. at 771. (260.) Id. at 774. (261.) Id. at 764. (262.) Id. (263.) Philadelphia Newspapers, Inc. v. Hepps, 475 U.S. 767, 775 (1986). (264.) Dun & Bradstreet, 472 U.S. at 762. (265.) Id. at 762 (emphasis added). (266.) Id. (quoting Virginia Pharmacy Bd. v. Virginia Citizens Consumer Council, Inc., 425 U.S. 748, 764 (1976)). (267.) Id. (quoting New York Times Co. v. Sullivan, 376 U.S. at 270). (268.) Sullivan, 376 U.S. at 271. (269.) Id. at 270. (270.) Dun & Bradstreet, 472 U.S. at 762. (271.) Corporate Finance Criteria, Supra note 6, at 7. (272.) Dun & Bradstreet, 472 U.S. at 762. (273.) See supra note 197 and accompanying text. (274.) See supra subpart II.B. (275.) Id. (276.) First Equity Corp. v. Standard & Poor's Corp., 869 F.2d 175 (2d Cir. 1989); see also supra subpart II.C. (277.) Mallinckrodt Chemical Works v. Goldman, Sachs & Co., 420 F. Supp. 231 (S.D.N.Y. 1976). (278.) See supra subpart II.C.1. (279.) See supra subpart II.C.2. (280.) See supra subpart I.C. (281.) Id. (282.) See supra part III. (283.) New York Times Co. v. Sullivan, 376 U.S. 254 (1964); see also supra subpart III.C.
Carsten Thomas Ebenroth Director of the Center on International Economics and Professor of Law, Un Germany. Referendar (J.D.) 1967; M.B.A. 1968; Doktor der Wirtschaftswissenschaften (Dr. rer. pol.) 1969; Doktor der Rechte (S.J.D.) 1971; Privatdozent 1974; Free University of Berlin Schoo of Law.
Thomas J. Dillon, Jr. Of the Georgia Bar and Member of the Center on International Economics, Univ Constance, Germany.…