EU and Swiss Liability Regime for Credit Rating

with respect to civil liability rules; in this respect, the Swiss liability regime can be treated alongside the EU regime.

At present, there is debate at the EU level on the necessity of introducing a common EU level principle of civil liability for CRAs.⁴³⁶ Many commenta-tors suggest that the EU harmonize national regimes throughout Europe.⁴³⁷ Unless the EU adopts a regulation establishing a single liability regime, there are as many regimes for CRA liability as there are Member States.

Currently Member States determine whether or not their laws hold CRAs liable for their misconduct individually.⁴³⁸

It is worth describing the main legal systems in the EU and in Switzerland to analyze whether or not they include a liability regime for CRAs.

Broadly speaking, legislators have two options. The first implies including CRA liability in the general rules. In this respect, CRAs would receive the same legal treatment as other gatekeepers, market participants and indi-viduals in general. It is the current situation in most legal frameworks, such as in Germany and Switzerland for instance.⁴³⁹ EU legislators have not deemed it necessary to introduce a special liability regime for CRAs. The second option consists of establishing CRA liability in a special law. This would be the case in the EU if the EU regulator introduced CRA liability in a regulation concerning CRAs exclusively.

France offers the best example of a special liability regime for CRAs.⁴⁴⁰ Indeed, in 2010 the French law of banking and financial regulation intro-duced a special provision establishing CRA liability.⁴⁴¹ The French

436 EU Public Consultation on Credit Rating Agencies, at 24-25.

437 AMF Response to the European Commission Consultation on Future Measures to be taken on Credit Rating Agencies, at 6; but see The United Kingdom Authorities Response to the European Commission Internal Market and Services Consultation Document on Credit Rating Agencies, at 2, 18 (contending that there is no need to introduce civil liability in the EU framework for CRAs, because it would be counterproductive to reducing the reliance on credit ratings, as well as risk weakening competition).

438 TCHOTOURIAN, Agences de notation: encadrement et responsabilité, at 119ss.

439 See, e.g., for Switzerland, TRINDADE &SENN,Control and Responsibility of Rating Agencies in Switzerland, at 156ss (stating that – under Swiss law – there is no specific provision ruling the civil liability of CRAs, i.e. the general standards of the Swiss Code of Obligations apply).

440 But see THÉPOT,L’encadrement légal de l’activité des agences de notation par la loi de régulation bancaire et financière, at 26ss, and also THÉPOT,L’encadrement des agences de notation: “trop de loi tue la loi”, at 6 (criticizing the new liability rule for CRAs, as many French scholars and commentators do).

441 Loi française de régulation bancaire et financière, art. 10 (to be codified in Code monétaire et financier, art. L. 544-5).

tor proceeded on the assumption that the general framework for civil, con-tractual and tort liability is not well designed to deal with the role of CRAs in financial markets.⁴⁴² By this means, France followed the path of the US Dodd-Frank Act of 2010 and adopted a special liability rule in relation to CRAs. However, although the new liability regime offers an easier path to sue CRAs, the difficulties in proving CRA liability will make successful cases rare albeit not inexistent.⁴⁴³

In the various legal systems, the basis for civil liability may be contractual, quasi-contractual or tortious, depending on the relationship between the CRA and the market participant that sustained losses. If the two parties concluded an agreement, the ground for liability is contractual liability. Un-der the investor-pays business model, CRAs and investors are contractually bound, i.e. investors can sue CRAs based on the contractual relationship.

Under the issuer-pays business model, the contractual relationship is be-tween CRAs and issuers. Issuers can possibly sue CRAs on a contractual basis but investors are third parties.

If the legal basis is contractual, the conditions for liability are typically breach of contract, damage, causality and fault.⁴⁴⁴ The advantage of con-tractual liability is that there is – in most legal systems – a reversal of the burden of proof that can make it easier to prove fault.⁴⁴⁵ From another per-spective however, contractual liability is generally trumped by CRAs’ stan-dardized contractual clauses on limitations and exclusions from liability.⁴⁴⁶ Nevertheless, legal systems generally do not allow unrestricted limitations of contractual liability. In France, the new liability rule states that contrac-tual clauses including limitations of liability that are possibly total exclu-sions of liability are void.⁴⁴⁷ In Germany, concern has been voiced – given the CRAs’ position of trust – that even an exclusion of liability for slight negligence jeopardizes the purpose of the contract and is thus invalid.⁴⁴⁸ In Switzerland, according to the general rules of the Code of Obligations, clauses of exclusions of liability for intent and gross negligence are void.⁴⁴⁹ In short, legal systems generally consider exclusions of liability as too ex-tensive but allow limitations of liability.

442 CHARTIER, Rapport sur le projet de loi de régulation bancaire et financière, at 72.

443 MARINI, Rapport n° 703) fait au nom de la commission des finances, at 7.

444 See, e.g., Swiss Code of Obligations, art. 97.

445 BLAUROCK, Control and Responsibility of Credit Rating Agencies, at 18-19.

446 Id., at 19.

447 Loi française de régulation bancaire et financière, art. 10 (to be codified in Code monétaire et financier, art. L. 544-6).

448 BLAUROCK, Control and Responsibility of Credit Rating Agencies, at 19 (with accompanying note).

449 Swiss Code of Obligations, art. 100, para. 1; EMMENEGGER, Rating und Haftung, at 69.

In many cases however, there is no contract between CRAs and damaged market participants. The typical case is when investors sustain losses due to their reliance on inaccurate credit ratings. If the issuer-pays business model prevails, investors cannot invoke contractual liability. This was the case relating to subprime mortgage ratings.

In the absence of a contract, the question arises as to the potential legal ba-sis for liability. Clearly, tort liability is the most common possibility. In France, the new legislation on banking and financial regulation refers to tort law as a potential ground for liability.⁴⁵⁰ Typically, the conditions that need to be met in order to prove liability are a tortious act, damage, causality and fault.⁴⁵¹ The presence of a tortious act refers to the fact that CRAs acted unlawfully. According to Swiss courts, conduct should be regarded as un-lawful if it violates orders or prohibitions of written or unwritten law pro-tecting the property that was damaged.⁴⁵²

Other legal frameworks know original types of liability that can be quali-fied as quasi-contractual. Broadly speaking, the ground for liability is not based on a contract but on confidence. This is the case in Germany and Switzerland where the notion of “liability based on confidence” or “liability based on trust” was developed.⁴⁵³ In this respect, there are two particular conditions to be met. First, the “special position of trust” requires the pres-ence of a relationship equivalent to a contract.⁴⁵⁴ Second, the notion of

“disappointment of confidence” means that the CRA deceived the trusting party.⁴⁵⁵ The idea of these two conditions relates to the fact that this type of liability protects the confidence of a party that has no contract but deserves special treatment. The other conditions are – as for other types of liability – damage, causality and fault.⁴⁵⁶ As for contractual liability, there is a reversal of the burden of proof with respect to the condition of fault.

450 Loi française de régulation bancaire et financière, art. 10 (to be codified in Code monétaire et financier, art. L. 544-5) (mentioning tort liability as “responsabilité délictuelle” et “quasi-délic-tuelle”).

451 See, e.g., Swiss Code of Obligations, art. 41.

452 TRINDADE &SENN,Control and Responsibility of Rating Agencies in Switzerland, at 156ss.

453 In German “Vertrauenshaftung”; the Latin expression liability for “culpa in contrahendo” is also commonly used.

454 In German “Sonderverbindung”. See, e.g., for Germany, KORTH, Dritthaftung von Rating-agenturen, at 77-78 (with accompanying note).

455 In German “Vertrauensenttäuschung”. See, e.g., for Switzerland, VASELLA, Die Haftung von Ratingagenturen, Ein Beitrag zur Expertenhaftung, at 252.

456 Id.

More particularly, there are types of liability that can count as a subset of

“liability based on confidence”, such as expert liability and prospectus li-ability.⁴⁵⁷

In Switzerland, prospectus liability is relevant when credit ratings are parts of prospectuses, whereby this condition can under certain circumstances even be met if credit ratings are disclosed separately from prospectuses. ⁴⁵⁸ Liability is questioned after the publication of erroneous prospectuses.

CRAs can only be held liable if they knew that their credit ratings were dis-closed inside or alongside the prospectuses that misled market partici-pants.⁴⁵⁹ Under Swiss law, CRAs can be held responsible if they decisively influenced the compilation of prospectuses of a public company.⁴⁶⁰ In con-trast, in Germany the principles on prospectus liability under stock ex-change and civil laws have little relevance in this area.⁴⁶¹

Apart from that, Switzerland also recognizes expert liability.⁴⁶² The Swiss Supreme Court has acknowledged the possibility of expert liability if a third-party expert opinion is conveyed to a market participant with the con-sent of the expert.⁴⁶³ Interestingly, this situation has similarities with the solution proposed by the US Dodd-Frank Act of 2010.⁴⁶⁴

Finally, it is worth mentioning that the UK is reluctant to recognize CRA liability.⁴⁶⁵ The UK authorities have recently raised concern about the det-rimental impact of CRA liability on the behavior of market participants.

CRA liability may potentially reduce market participants’ own incentives to exercise due diligence.

In a nutshell, it tends to be more difficult to prove CRA liability if the re-gime is based on general liability rules. The creation of special liability rules makes it easier for market participants to sue CRAs because it demon-strates the willingness of lawmakers to make CRAs more accountable. It will be interesting to observe whether the EU decides to adopt a special li-ability regime for CRAs.

457 Id., at 249, 297-298. See also EMMENEGGER, Rating und Haftung, at 88 (with accompanying note).

458 VASELLA, Die Haftung von Ratingagenturen, Ein Beitrag zur Expertenhaftung, at 303.

459 EMMENEGGER, Rating und Haftung, at 96-97.

460 TRINDADE &SENN,Control and Responsibility of Rating Agencies in Switzerland, at 156ss;

BLAUROCK, Control and Responsibility of Credit Rating Agencies, at 24.

461 Id. (with accompanying note).

462 In German “Gutachterhaftung”. See EMMENEGGER, Rating und Haftung, at 88-89.

463 Swiss Supreme Court, BGE 130 III 345ss (Dec. 23, 2003).

464 See supra Part 2, Chapter 4(IV)(3).

465 The United Kingdom Authorities Response to the European Commission Internal Market and Services Consultation Document on Credit Rating Agencies, at 2, 18.