The EU private international law framework for civil disputes concerning credit ratings: Exploring the status quo and prospects of reform

Abstract

This article addresses the EU private international law framework for cross-border disputes concerning credit ratings. It argues that investors harmed by faulty ratings face considerable challenges when enforcing claims against credit rating agencies. These challenges arise not only due to the high standard of proof for damages claims and additional barriers rooted in substantive law but also from the limited territorial reach of the common EU civil liability regime of Article 35a of the amended Regulation (EC) No 1060/2009. Additionally, uncertainties concerning the determination of the concurrently applicable national law and the lack of unified European cross-border collective redress mechanisms in the area of capital markets law compound the problem. Against this background, this article discusses the options for reforming the existing private international law regime to enhance investors’ access to justice in disputes with CRAs.

Keywords:

• credit rating agencies
• jurisdiction
• conflict of laws
• financial law
• torts
• securities
• Brussels Ia
• Rome II
• EU private international law

A. Cross-border implications of disputes concerning CRAs’ liability

1. Background

Credit rating agencies (CRAs) are key players in most modern capital markets, fulfilling a critical dual role as information intermediaries and financial gatekeepers.¹ CRAs provide assessments about the creditworthiness of corporate borrowers, governments and other debt issuers (issuer ratings) or financial instruments (issue ratings), which are traditionally summed up in letter grades, ranging from “Triple-A” (excellent) to “C” or “D”. The rating market has long been dominated by Standard & Poors, Moody’s and Fitch Ratings (commonly referred to as the “Big Three”), whose ratings are financed by the rated entities themselves (under an “issuer pays” model) and made publicly accessible.² Only a few smaller agencies provide unsolicited ratings to gain market shares, which are usually financed by subscribers such as credit institutions, insurance undertakings, institutions for occupational retirement provision and other professional investors.³ In any case, credit ratings help compare the relative risk of the default of securities and, ideally, enable investors to make rational investment choices.⁴ Similar to auditors, securities analysts and investment bankers, CRAs compensate for information asymmetries between issuers and investors and, consequently, facilitate, impede or even prevent private and public borrowers’ access to financial markets.⁵ This “gatekeeping function” of CRAs is firmly entrenched in banking and securities regulation, as exemplified in the EU by the Capital Requirements Regulation,⁶ which allows banks and other investment firms to use credit ratings as a reference for the calculation of capital requirements for solvency purposes.

2. Increased oversight and regulation of CRAs in the wake of the global financial crisis

While credit ratings have scarcely been regulated in the past,⁷ increasing the oversight of CRAs became a matter of utmost urgency for G20 leaders in the wake of the 2008 global financial crisis.⁸ There was wide agreement that systemic weaknesses in financial market regulation, and, more specifically, investors’ overreliance on overly positive credit ratings relating to multiple securitisations, were at the root of the subprime mortgage crisis.⁹ More specifically, the “Big Three” were accused of not only having failed to see the looming danger on the market for structured finance products, namely, residential mortgage-backed securities and collateralised debt obligations but also of having at least negligently overvalued these securitisations as the crisis escalated, thereby contributing to the creation of the real estate bubble in the United States.¹⁰ In response, extensive action plans and reform measures were adopted in the aftermath of the financial crisis in many parts of the world, especially in Europe and the United States. In the United States, the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (“Dodd-Frank Act”)¹¹ introduced several measures aimed at reducing the regulatory value of credit ratings, improving the quality of ratings, and mitigating conflicts of interests inherent in the “issuer pays” model. Particularly, nationally recognised statistical ratings organisations (NRSROs)¹² were required to establish internal control systems, while the regulatory powers of the Securities and Exchange Commission were extended, especially with regard to the transparency of rating performance and rating methodologies.¹³ In line with this, Regulation (EC) No 1060/2009 (hereafter, the “CRA Regulation”)¹⁴ was introduced in the EU, establishing a common framework of conditions for the issuing of credit ratings and rules on the organisation and conduct of CRAs, which has since been amended twice.¹⁵ Its self-proclaimed goal was to mitigate conflicts of interest and ensure high quality and sufficient transparency of credit ratings and rating processes in the EU (Article 1 and Recital 1 CRA Regulation).

While the measures taken differ in detail, a particular feature common to both the Dodd-Frank Act and the amended CRA Regulation is that they are strongly imbued by the policy rationale of fostering public sanctioning and enforcement mechanisms through private enforcement and civil litigation to deter wrongdoing (“regulation through litigation”).¹⁶ To this end, the second amendment¹⁷ of the CRA Regulation introduced Article 35a, stipulating that a CRA assumes liability if it has committed, intentionally or with gross negligence, any of the infringements specified in Annex III of the Regulation, thereby causing damage to an investor or issuer, provided that this infringement affected the credit rating.¹⁸ However, with the benefit of hindsight, it is clear that the EU liability regime has failed to substantially harmonise CRAs’ civil liability and visibly improve the positions of investors and issuers against CRAs, as will be outlined below.

3. Anomalies of the civil liability regime of Article 35a CRA Regulation

While the introduction of a uniform civil liability regime for CRAs was initially considered by many scholars as a generally useful complement to the regulatory framework for credit ratings,¹⁹ there has been widespread scepticism since the beginning as to whether Article 35a CRA Regulation actually enables investors and issuers to effectively enforce CRAs’ liability towards them.²⁰ A frequently voiced criticism relates to the conspicuous lack of a substantial facilitation of the onerous burden of proof placed on investors.²¹ As other critics have emphasised before, it is already challenging for private investors to establish all the requirements for the claim, particularly, to prove not only the infringement of the CRA Regulation and its impact on the rating but also that they had “reasonably relied” on the rating when making a detrimental investment decision.²² It is even harder to see how institutional investors shall establish that they had “reasonably relied” on the disputed rating, without having breached their duty under Article 5(1) CRA Regulation to carry out their own assessments of the issuer’s creditworthiness and not to rely “solely and mechanically” on a rating.²³

Another salient feature of the liability rule is the extent to which it refers to the applicable national law.²⁴ Deviating from the principle of the autonomous interpretation of EU law, Article 35a(4) first sentence CRA Regulation stipulates that terms such as “damage”, “intention”, “gross negligence”, “reasonably relied”, and “due care”—which make up the essential elements of the claim—must be “applied and interpreted in accordance with the applicable national law as determined by the relevant rules of private international law”. Furthermore, recourse to national law is necessary for assessing whether any (contractual) limitations of liability are “appropriate and reasonable” and formally and substantially valid (Article 35a(3) CRA Regulation); further, such recourse is necessary for filling the gaps of the liability regime (Article 35a(4) second sentence CRA Regulation), especially regarding time limitations. To put it succinctly, the EU legislator did not even attempt to define a common minimum liability standard and introduced no more than a basic concept of a liability rule, the application of which is dictated by national law, thereby perpetuating the divergences among Member States concerning civil liability for rating activities.²⁵ Fully in line with this piecemeal approach, it was explicitly left to the Member States to introduce or maintain liability rules that are more favourable to investors and issuers, apparently even with respect to violations of the CRA Regulation (Article 35a(5) CRA Regulation).

However, the most glaring anomaly in the EU liability regime is its limited extraterritorial reach. Since the CRA Regulation generally only applies to credit ratings issued by CRAs registered in the EU and which are disclosed publicly or distributed by subscription (Article 2(1) CRA Regulation), it is widely assumed that agencies established outside the EU, especially the “Big Three”, which all have registered and principal offices in New York (and, in case of Fitch Ratings, also in London), do not fall within the scope of Article 35a CRA Regulation.²⁶ At first sight, this interpretation might raise doubts, given that Article 35a covers, without reservation, “credit rating agencies”, which are most broadly defined in Article 3(1) as “legal person[s] whose occupation includes the issuing of credit ratings on a professional basis”.²⁷ However, from a textual and systematic interpretation linking the infringements listed in Annex III with Article 2(1), it can be inferred that the obligations imposed by the CRA Regulation generally apply only to CRAs registered in the EU, unless expressly stated otherwise. Certainly, some infringements listed in Annex III CRA Regulation, namely, the violation of the duty of CRAs established in the EU to apply for registration (Article 14(1) CRA Regulation) and non-compliance with specific disclosure requirements placed on all CRAs, including third-country CRAs certified in accordance with Article 5 CRA Regulation (Articles 11(2) and 23b, in conjunction with Article 5(8)), can only or as well be committed by non-registered CRAs. Nevertheless, it is unlikely that such misconduct will, as required for liability to arise, have an “impact” on credit ratings. Only a few types of violations related to rating processes and methodologies are likely to give rise to liability: first, violation of the agency’s duty to use all available information relevant for its assessments according to the applicable rating methodologies (Annex III No I (42) CRA Regulation) and, second, failure to use rigorous, systematic, continuous methodologies that are subject to validation based on historical experience, including back-testing (Annex III No I (43) CRA Regulation).²⁸

Notably, third-country credit ratings issued by CRAs may only be used within the EU for regulatory purposes if they originate from certified CRAs or if they are endorsed by an EU-established CRA in accordance with the Regulation.²⁹ Consequently, the “Big Three” CRAs have set up subsidiaries in some Member States exactly for the purpose of making their ratings available for regulatory uses in the EU through their daughter companies.³⁰ However, under Article 4(5) CRA Regulation, the full responsibility for compliance with the conditions for endorsing third-country credit ratings stipulated in Article 4(3) rests with the endorsing agency established in the EU. Thus, only the endorsing agency may become liable under Article 35a CRA Regulation if the prescribed conditions are not met (Annex III No I(1) CRA Regulation) or if the endorsement is exploited to circumvent the requirements of the Regulation (Annex III No I(2) CRA Regulation), while the parent company’s liability is entirely governed by national law.³¹ Ominously, the CRA Regulation does not provide for direct liability of the parent companies of endorsing CRAs nor does it impose any capitalisation and capital maintenance requirements on third-state CRAs with respect to their European subsidiaries, meaning that, in the event of mass damages caused by endorsed ratings, (European) investors might not gain any compensation unless national law steps in and provides for an effective parent company’s liability in such a situation.³²

4. Tackling the private international law issues of disputes regarding CRAs’ liability

Considering that ratings are usually made publicly accessible and that the vast majority of credit ratings are still provided by the “Big Three”,³³ it is obvious that disputes concerning credit ratings frequently exhibit strong cross-border implications. Given that, as mentioned above, civil liability for credit ratings continues to be effectively governed by national law, even within the EU,³⁴ the first and foremost question when assessing claims of investors and issuers against CRAs has to be which national law applies, be it for the purposes of supplementing the EU liability rule of Article 35a CRA Regulation or for providing additional or alternative national legal remedies.

The answer to this question is relatively straightforward as far as disputes between CRAs and their clients are concerned.³⁵ By contrast, determining the applicable law and identifying the competent courts of jurisdiction in disputes between CRAs and harmed third parties, especially retail investors, is a challenging task.³⁶ This issue is inextricably linked to the long-standing general debate on locating pure economic loss or, more generally, non-material damage for the purposes of determining the applicable law under Article 4(1) of the Rome II Regulation³⁷ (hereafter, “Rome II”), and establishing jurisdiction by reference to the “place of damage”, which is recognised as one of two alternative linking factors to be used under Article 7(2) of the Brussels Ia Regulation³⁸ (hereafter, “Brussels Ia”).³⁹ In fact, damage arising from faulty ratings is a prime example of non-material damage; while the investor’s damage may consist of having purchased the securities to which or to whose issuing company the rating in question relates for a price which they are not worth, for having sold them for a price too low, or simply for holding securities whose value deteriorates once the rating turns out to be false, the rated entity usually incurs increased refinancing costs as a result of unduly negative ratings or inappropriate downgrades and warnings issued by CRAs.⁴⁰ Therefore, it is hardly surprising that the allocation of international jurisdiction and the determination of the applicable law in credit rating disputes are hotly disputed.⁴¹

All issues of private international law in cross-border litigation concerning credit ratings, including questions on the recognition and enforcement of judgments abroad, are topically important in light of recent comparative legal research conducted under the auspices of the International Academy of Comparative Law.⁴² These studies indicate an increasing inclination among national courts, both within and beyond the EU, to assert jurisdiction over foreign CRAs and hold them accountable in a way that reflects their importance for financial markets,⁴³ meaning that the solution of the unresolved private international law aspects becomes even more pressing.

Against this background, this article critically assesses the EU private international law framework for cross-border litigation concerning credit ratings. It comprises four sections. Following this introduction, this study examines the allocation of international jurisdiction in credit rating disputes (section B.). The third section explores the relationship between the CRA Regulation and the general conflict-of-laws rules (C. 1), addresses questions of the characterisation of relevant legal bases of liability (C. 2), and delves into the central issue of determining the applicable national law (C. 3). Finally, prospects for reform are discussed with a view toward enhancing investors’ access to justice and ensuring predictability of court decisions for all parties involved (D).

B. Competent courts of jurisdiction

Regarding the attribution of international jurisdiction for proceedings against CRAs in Member State courts, it is necessary to distinguish between CRAs established within and outside the EU. Since the bases of jurisdiction laid down in Chapter II of Brussels Ia apply only if the defendant is domiciled in a Member State, subject to the exceptions mentioned in Article 6(1) Brussels Ia, which are irrelevant in the present context,⁴⁴ actions brought against the “Big Three” and the few certified CRAs⁴⁵ do not fall within the purview of Brussels Ia because none of these agencies has either its “statutory seat”, its “principal place of business” or its “central administration” within the meaning of Article 63(1)(a)–(c) Brussels Ia in a Member State.⁴⁶ Accordingly, the domestic laws on the international jurisdiction of the forum State apply. In contrast, regarding actions brought against CRAs established in the EU, which are required to apply for registration with the European Securities and Markets Authority (ESMA), pursuant to Article 14(1) CRA Regulation, the bases of jurisdiction laid down in Brussels Ia apply, given that the CRA Regulation does not provide itself for an (exclusive) basis of jurisdiction for claims arising under its Article 35a but instead only vaguely refers to the “relevant rules of private international law” (Article 35a(4) third sentence CRA Regulation) for identifying the competent courts of jurisdiction.⁴⁷

1. Actions against CRAs established in the EU

As far as proceedings against CRAs established in the EU are concerned, a further distinction must be drawn between situations where parties have or have not entered into a contract with one another. For disputes arising from rating contracts (or subscription agreements) between CRAs and their clients, jurisdiction usually (only) lies with the courts of the CRA’s home country, either due to a choice-of-court agreement made in accordance with Article 25(1) Brussels Ia, or, failing an agreement to that effect, under the general rule of Article 4(1) Brussels Ia.⁴⁸ Where proceedings are initiated by third parties, that is, ordinary retail investors (or issuers in the case of unsolicited ratings), it is more difficult to assess the conditions under which jurisdiction lies in a Member State other than the one of the CRA’s domicile. What can be safely inferred from the Court Justice of the European Union (CJEU) case law on the third-party effects of choice-of-court agreements⁴⁹ is that a CRA will not be able to displace the special jurisdiction of a Member State court vis-à-vis a third party by way of a pre-formulated forum selection clause included in the contract with its client without the third party’s consent. Furthermore, since CRAs do not “freely assume obligations” towards the general investor public but only towards their clients, it seems equally clear that disputes between CRAs and private investors generally do not relate to a “contract” within the meaning of Article 7(1) Brussels Ia.⁵⁰

However, since the broadly defined residual concept of “matters relating to tort, delict and quasi-delict” of Article 7(2) Brussels Ia covers “all actions which seek to establish the liability of a defendant and which are not related to a “contract””,⁵¹ the investor may possibly rely on this special jurisdiction in tort to initiate proceedings in a Member State other than the one where the CRA has its seat. Article 7(2) Brussels Ia generally gives the claimant the choice between suing either in the place where the event giving rise to the damage occurred or the place where the damage actually manifested itself.⁵² For the purposes of localising these places in disputes concerning credit ratings, regard is to be had to the core principles underpinning Article 7(2) Brussels Ia, that is, to attribute jurisdiction to a court that is well placed to decide the case, owing to its proximity to the dispute and the ease with which evidence can be produced, while simultaneously ensuring legal certainty and foreseeability of jurisdiction for all parties involved.⁵³

Where credit ratings are made publicly accessible via the internet, as is standard practice, it seems reasonable to generally locate the event giving rise to the damage at the place where the rating was first published, that is, the CRA’s headquarters, in light of the aforementioned policy objectives.⁵⁴ To support this, one may first argue that publication is the decisive and final act on the part of the CRA, which potentially gives rise to the damage sustained by individual investors (or issuers). Second, localising the causal event at the CRA’s headquarters is in line with the aim of facilitating the acquisition of evidence, given that all information relevant to assessing whether the CRA has failed to fulfil its obligations during its rating activities should be available at the CRA’s principal office. Third, this interpretation avoids any possible fragmentation of litigation in the eventuality of the online publication of credit ratings, which may occur if the place of the receipt of the rating is considered decisive, and thus ensures that jurisdiction will not lie with a forum that the CRA could not expect to be competent in deciding the dispute. As far as Mankowski objects that this interpretation renders the place of the harmful event as a basis of jurisdiction nugatory, given that it would then generally coincide with the CRA’s domicile,⁵⁵ it may be replied that the CJEU’s jurisprudence must not be misunderstood as meaning that a claimant must always have a choice between two or three different fora in tort cases. A closer analysis of this case law suggests that the two prongs of Article 7(2) Brussels Ia, as interpreted by the CJEU, most often point to the same places and/or the defendant’s domicile.⁵⁶

As mentioned, localising the damage arising from incorrect ratings under the second prong of Article 7(2) Brussels Ia is subject to even greater uncertainty.⁵⁷ The interlinked questions as to what exactly constitutes “damage” as far as investor claims against CRAs in respect of faulty ratings are concerned and where the relevant damage must be deemed to occur equally arise in the choice of law context under Article 4(1) Rome II, where they are usually treated in more detail in legal scholarship and will equally be examined in this article.⁵⁸

Here, it should be noted that the Corte Suprema di Cassazione (the Italian Supreme Court), in an action concerning an Italian investor who had purchased certificates issued by Lehman Brothers and subsequently suffered losses when the bank defaulted and then sued Standard & Poors (which had provided the issuer rating), held that Italian courts were not competent to decide the action on the basis of the place of damage under Article 5(3) Brussels I, which applied, by analogy, under Italian domestic law for proceedings against non-EU domiciliaries, because, for the purposes of identifying the locus damni, regard must be had to the place where the transaction constituting the investor’s loss was carried out; thus, since the claimant’s detrimental investment was not made on the Italian financial market, Italian courts could not exercise jurisdiction over the defendant in said case.⁵⁹ This ruling is seemingly consistent with the CJEU’s seminal judgment in its case, Verenigeng van Effectenbezitters v BP (VEB), where it, for the first time, adopted a “market-oriented” approach of allocating jurisdiction concerning the issuer’s liability towards investors for violations of ongoing disclosure requirements, holding that only the courts of the place where the defendant was subject to statutory reporting obligations were competent to decide the dispute on the basis of the place of damage.⁶⁰ As will be explained in more detail in the choice of law context, there are good reasons for consistently applying a “market theory” of localising damage, albeit with some qualifications, for the purposes of both determining the law governing CRAs’ non-contractual liability towards investors and establishing tort jurisdiction.⁶¹

2. Actions against CRAs established outside the EU

An examination of the sparse national case law suggests that investors and issuers are generally unable to pursue claims against CRAs established outside the EU in Member State courts. This applies especially to CRAs’ clients, given that agencies are likely to include exclusive jurisdiction clauses in favour of courts at their respective registered offices in rating contracts and subscription agreements.⁶² Whether ordinary investors can rely on the jurisdiction of a Member State’s court for proceedings against third-country CRAs depends on the conditions and circumstances under which national courts assert jurisdiction over foreign defendants in accordance with domestic law. In Member States whose legal systems do not generally enable the courts to exercise jurisdiction in tort cases or, more specifically, disputes related to financial market regulation, on the mere basis that the (financial) damage was sustained within the territory of the forum State,⁶³ it will not be possible for investors to sue third-State CRAs in court, given that the place where the act giving rise to the damage was committed (which is, in most national legal systems, traditionally used at least as one linking factor in tort cases) will probably lie outside the EU.⁶⁴ Apart from this, even if the locus damni is generally recognised in the forum State (thereby providing a basis for exercising jurisdiction), the courts are unlikely to assume jurisdiction for investor actions against CRAs solely because the investor is domiciled or some of her or his assets such as bank accounts are situated within the territory of the forum State, but only, as the above-mentioned decision of the Corte Suprema di Cassazione suggests, if further links (such as the place of the transaction causing the financial loss) point to this country.

Comparative research indicates that investors in only a few Member States have the benefit of a forum actoris for pursuing claims against third-country CRAs. Notably, the Bundesgerichtshof (German Federal Court of Justice) held, in a case that parallels the one upon which the cited decision of the Corte Suprema di Cassazione is based, that German courts were competent to rule on an action brought by retail investors against Standard & Poors. This competence was grounded in the fact that the defendant’s property (in the instant case, this included debts arising from contracts with domestic banks and companies) was located in German territory and that the claimants were domiciled in the forum State.⁶⁵ From a comparative law perspective, this exorbitant basis of jurisdiction—the application of which is expressly excluded by Article 5(2) Brussels Ia for disputes falling within the reach of the common jurisdictional framework—is exceptional and, if recognised, it is applied strictly; most European investors cannot comfortably sue US-based CRAs in their home countries on this tenuous basis.⁶⁶

In any event, even assuming that a Member State court asserted jurisdiction over an American CRA merely because its property was deemed to be located within the territory of the forum State and that the action was successful on the merits, US courts would likely refuse enforcement of that judgment because assuming jurisdiction on this basis has been held to violate the “due process clause” by the United States Supreme Court,⁶⁷ which provides a statutory ground for refusal of recognition.⁶⁸ Hence, investors would, even if their actions were successful, be limited to enforcing judgments outside the United States.⁶⁹

C. Choice of law issues

1. The territorial reach of Article 35a CRA Regulation

First, there is some controversy regarding the relationship between the substantive liability rule in Article 35a CRA Regulation and the general rules of private international law. At least at first sight, it seems reasonable to infer from Article 35a(3) and (4) CRA Regulation, by way of an argumentum e contrario, that recourse to the general rules of private international law is only required insofar as this is expressly stipulated—namely, for matters not defined in or regulated by the substantive liability regime itself. Accordingly, the preliminary question of whether Article 35a CRA Regulation applies in the first place is arguably conclusively defined by the Regulation itself.⁷⁰ More specifically, Article 2(1) CRA Regulation, by generally defining the territorial reach of the CRA Regulation, including its liability regime, contains an implicit unilateral conflict-of-laws rule which, according to the principle lex specialis derogat legi generali, as expressed in Article 23 of the Rome I Regulation (hereafter, Rome I)⁷¹ and Article 27 Rome II, takes precedence over the general conflicts-of-laws rules. Arguably, it is unnecessary for Article 35a CRA Regulation to apply that the rules of private international law refer to the law of a Member State; rather, the crucial issue is whether the rating was issued (or endorsed) by a CRA registered in the EU.

2. Characterisation of the legal bases of CRAs’ liability

To identify the relevant choice-of-law rules, it is necessary to accurately characterise the obligation on which the claim of the person seeking compensation is based. The possible bases for CRAs’ liabilities are diverse. Liability may arise, if applicable, under Article 35a CRA Regulation, and/or domestic contract law or tort law, such as negligence and liability for intentional infliction of damage contra bonos mores, categories oscillating between contract and tort, especially the peculiar concept of a contract generating “protective effects” towards third parties,⁷² and, furthermore, capital markets law or corporate law.⁷³ In determining the national law supplementing the EU liability regime in accordance with Article 35a(3) and (4) CRA Regulation, it becomes imperative to characterise the obligation imposed by Article 35a(1). This characterisation should be undertaken in light of the CJEU’s case law concerning the delineation of the concepts of “matters relating to a contract” (Article 7(1) Brussels Ia) and “matters relating to tort, delict and quasi-delict” (Article 7(2) Brussels Ia), which, due to the consistency paradigm (Recital 7 Rome I, Recital 7 Rome II), gains significance for drawing a clear line between the notion of “contractual obligations” within the meaning of Article 1(1) Rome I and its counterpart “non-contractual obligations” in the sense of Article 1(1) Rome II.⁷⁴

Taking stock of this case law, the obligation arising under Article 35a CRA Regulation falls precisely within the concept of “non-contractual obligations”.⁷⁵ As is clear from Recital 32 of the amended CRA Regulation, this liability rule aims to empower all investors and issuers to hold CRAs liable for damage sustained due to credit ratings issued in breach of the CRA Regulation, regardless of whether there is a contract between the parties and, if so, whether the alleged damage was covered by liability for breach of contract. Even if the parties have concluded a rating contract (or subscription agreement) with one another, the single decisive issue in assessing the question of liability under Article 35a CRA Regulation is whether the CRA claimed to be liable had at least grossly negligently infringed its obligations referred to in Annex III CRA Regulation and whether this infringement had an impact on the credit rating due to which the person claiming compensation suffered damage. Given that assessing the legality or illegality of a CRA’s conduct does not require delving into the specifics of any contractual arrangement, obligations based on Article 35a CRA Regulation are inherently tied to matters relating to a tort or delict in the sense of Article 7(2) Brussels Ia.⁷⁶ Thus, they qualify as non-contractual obligations. In the absence of party choice (Article 14 Rome II), the EU liability regime is therefore generally supplemented by the lex loci damni, pursuant to Article 4(1) Rome II, unless displaced by Article 4(2) or Article 4(3) Rome II.

Regarding investor claims possibly available under national law, the characterisation of concepts oscillating between contract and tort law, most importantly the concept of a contract generating “protective effects” towards third parties, pose key questions.⁷⁷ From a functional perspective, which should dictate the delineation of the mutually exclusive concepts “contractual obligations” and “non-contractual obligations”, there is much to be said for characterising liability based on the doctrine of extending the protective effects of contracts between other parties to third parties as a non-contractual obligation.⁷⁸ This doctrine, like the concept of culpa in contrahendo, which indisputably qualifies as a non-contractual obligation (Article 12 and Recital 30 Rome II), is designed to overcome the limits of the respective national tort law system, particularly regarding the compensation of pure economic loss.⁷⁹ Thus, it would be inappropriate to apply a law other than the one governing tort liability, namely, the law applicable to the (rating) contract. On the one hand, this could lead to negative liability gaps to the detriment of investors if the lex loci delicti does not provide for claims in tort but in contract, based on the assumption that the rating contract generated protective effects towards third parties investing money in the rated securities, whereas the lex contractus provides for claims in tort under the same circumstances and might not even recognise the concept of including third parties within the scope of protection of a contract made between other parties.⁸⁰ On the other hand, separating the law governing an investor’s quasi-contractual remedies from the applicable tort law might also lead to the unnecessary accumulation of investor claims, which, in turn, necessitates taking measures to avoid double compensation.⁸¹

3. Determination of the applicable national law

Liability for breach of contract will usually be governed by the law of the agency’s home State, (in case of the “Big Three”, the law of New York), either by way of a choice-of-law clause to that effect, which CRAs are likely to insert in their contracts, in accordance with Article 3 Rome I, or, failing a party choice, pursuant to Article 4(1)(b) Rome I.⁸² The lex contractus governs not only liability for breach of contract (Article 12(1)(c) Rome I), but also concurrent non-contractual claims pursuant to Article 4(3) sentence 2 Rome II. By contrast, determining the law applicable to CRAs’ liability towards investors (or issuers), where there is no contractual relationship between the parties, is a delicate issue. As mentioned, the issue centres on the localisation of the “initial damage” in the sense of Article 4(1) Rome II.

a) Overview of the academic discussion

To the best of my knowledge, there is no case law by higher and superior Member State courts regarding the choice-of-law issues of cross-border litigation concerning CRAs’ liability. This is hardly surprising because CRAs, especially the “Big Three”, have seemingly been trying to avoid precedents since the financial crisis, settling out of court in order to uphold the common but flawed perception that they are “immune” to civil liability because credit ratings, which qualify as “mere opinions”, enjoy protection as free speech under the First Amendment of the United States Constitution.⁸³ However, it would be fallacious to assume that third-country CRAs could generally rely on the “First Amendment defence” and equivalent guarantees of freedom of speech applicable in their home countries as overriding mandatory provisions in order to escape liability for bad ratings in civil proceedings in Europe, irrespective of the otherwise applicable national law.⁸⁴ Foreign public policy rules cannot (at least according to the prevailing opinion) displace the lex causae, given that Article 16 Rome II— in marked contrast to Article 9 Rome I—provides only for the application of the overriding mandatory provisions of the forum State;⁸⁵ accordingly, foreign constitutional guarantees may only be taken into account under the “local data theory” on a discretionary basis.⁸⁶

Leaving this issue aside, there is no consensus regarding the determination of the law applicable to investor claims against CRAs. Some scholars contend that an investor’s individual damage arising from making a bad investment by relying on a faulty credit rating must be deemed to occur in the country of the investor’s habitual residence.⁸⁷ In stark contrast, others have called for the uniform application of the law of the country where the issuer of the rated securities has its central administration, either on the basis of Article 4(1) or (3) Rome II.⁸⁸ Another proposition has been to submit liability for credit ratings to the law(s) of the country (or countries) where the rating was “used” within the meaning of Articles 4 and 5 CRA Regulation, pursuant to Article 4(3) Rome II, aiming to align civil liability for credit ratings with the scope of the applicable supervisory regime.⁸⁹ Finally, some scholars have advocated for the application of the law of the country of the “affected” financial market regarding CRAs’ liability towards the investor public.⁹⁰ This aligns with the strong opinion calling for a market-based approach to determine the law applicable to torts related to the capital market context, such as market manipulation, insider trading, wrongful publication of a securities prospectus and infringements of issuers’ ongoing disclosure requirements.⁹¹

b) Assessment of the contrasting proposals

The aforementioned proposals are by no means free of criticism. First, the proposition to apply the law of the investor’s country of habitual residence must be rejected, at least on the basis of the law as it stands.⁹² It conflicts with the settled CJEU case law on Article 7(2) Brussels Ia, according to which the expression “place of damage” may not be construed so extensively as to encompass the investor’s domicile or the place where the investor’s assets are concentrated if the initial damage occurred elsewhere.⁹³ Building on this, the CJEU, in its above-mentioned decision in VEB, unequivocally rejected the suggestion to use the investor’s domicile or the place of the investment account as linking factors for establishing jurisdiction in disputes concerning an issuer’s liability for incorrect ad hoc disclosures, arguing that this would not ensure the required high degree of foreseeability of judicial competence.⁹⁴ In fact, locating damage by reference to the investor’s habitual residence could, in the case of publicly accessible credit ratings assigned to globally traded securities, lead to an uncontrollable fragmentation of the laws governing an agency’s liability towards a multitude of investors, making it virtually impossible to predict liability risks and obtain insurance. Thus, the use of the aforementioned linking factors runs counter to the objectives of Rome II, encapsulated in Recital 16, namely, enhancing the foreseeability of court decisions and achieving fairness and justice for all parties involved,⁹⁵ as it contradicts the aims of the Brussels jurisdictional regime.

The suggestion to uniformly submit CRAs’ non-contractual liabilities towards investors to the law of the country where the rated issuer has its central administration cannot be accepted either.⁹⁶ While it seems reasonable to assume that the issuer’s own damage resulting from bad ratings occurs primarily at its headquarters, locating the investor’s loss at the issuer’s principal office amounts to fiction. The investor’s damage, which, as stated, consists of having paid too high a price for the affected securities or having sold them for too low a price, is not conditional upon any damage incurred by the issuer of the securities—who is at any rate unlikely to suffer damage as a result of an overly positive rating—and cannot be discounted as an indirect consequence of a “primary” damage that has occurred elsewhere.⁹⁷ Article 4(3) Rome II is of no avail either. The suggestion to generally apply the law of the country of the issuer’s principal office without any consideration of the circumstances of the case would be inimical to the exceptional nature of the escape clause, as emphasised in its wording (“ … manifestly more closely connected … ”) and is clear from the legislative background of this provision.⁹⁸ This would amount to the introduction of a judge-made conflicts rule for the CRAs’ liability to the investor public in defiance of the legislative decision to maintain the place of damage as the primary linking factor. The proposition to apply the law of the country where the rating is used also comes down to a misuse of the escape clause and must be rejected as well, quite apart from the fact that it remains unclear which law shall apply if the rating, as usual, is “used” in more than one country.

All in all, while there is some controversy about the appropriateness of tying liability for ratings to the law of the country of the affected financial market, even amongst the backers of the “market principle”,⁹⁹ this solution is, in principle, preferable, even though this market-oriented-conflicts rule is yet to be clearly defined and qualified.¹⁰⁰ More specifically, CRAs’ liability towards the general investor public should be submitted to the law of the country of the financial market on which the securities, to which or to whose issuer the disputed credit rating relates, are listed and traded; in scenarios involving cross-listings, the relevant market is the one where the specific transaction constituting the investor’s loss was executed.¹⁰¹ Contrary to widespread belief, this solution requires no legislative intervention, nor is it necessary to have recourse to Article 4(3) Rome II or draw an analogy to Article 6(1) and (3) Rome II.¹⁰² Instead, Article 4(1) Rome II arguably leads directly to the application of the lex mercatus. This interpretation can be justified in two ways. On the one hand, is has been claimed that defective information relevant for investment choices primarily affected the financial market as an institution by distorting the price-setting mechanism and impairing the efficiency of the market, whereas individual losses suffered by investors were only “indirect consequences” of the initial damage that had already occurred in the market itself.¹⁰³ On the other hand, it has been argued that even though the individual damage sustained by an investor cannot be taken out of consideration for the purpose of determining the applicable law, this damage, which consists of entering into a legally binding obligation to purchase or sell securities based on a distorted price, is part and parcel of the adverse effects produced by faulty information for the market and thus occurs nowhere else than in the market where the affected securities are listed and traded.¹⁰⁴

What emerges from these contrasting positions is that submitting liability for financial torts to the law of the country of the financial market is not a logically inescapable conclusion but a policy choice inspired by the aim of promoting the objectives of capital markets law.¹⁰⁵ This solution has several well-known advantages: it creates a level-playing field for all financial players entering the same market, ensures that investors buying in the same market are treated alike, and is likely to spur global competition to introduce the best regulatory and civil liability standards for financial markets.¹⁰⁶ Hence, it is linked with the paradigm of “regulation through litigation”, as encapsulated in Article 35a CRA Regulation. Another advantage of tying CRAs’ liability to the law of the country of the affected financial market is that it provides for a procedurally expedient limitation of the applicable national liability regimes where globally accessible ratings affect the investment choices of numerous dispersed investors; thus, if the same approach is used for the purpose of establishing jurisdiction under Article 7(2) Brussels Ia (or under the corresponding national grounds of tort jurisdiction as regards third-country CRAs), it facilitates collective actions in a forum other than the one at the CRA’s headquarters.

While Lehmann raises concerns that applying the law of the country where the relevant securities are traded in scenarios involving issuer ratings might appear arbitrary from a CRA’s perspective,¹⁰⁷ this argument cannot be generally accepted. Since issuer ratings are, just as issue ratings, solicited by borrowers with a view to gain or maintain access to the financial market, CRAs should thoroughly understand, after having properly analysed the rated entity’s creditworthiness, on which financial markets the instruments issued by that entity are already admitted to trading at the time of the publication of the rating, or to which market that entity seeks to address an initial public offering (IPO) of securities supported by the solicited rating. Accordingly, tying CRAs’ liabilities towards investors to the country of the affected market generally ensures that the applicable law is reasonably foreseeable for all parties involved without giving either investors or CRAs an unfair advantage to the detriment of the other party.

Different considerations apply when the rated entity seeks admission to trading in a particular financial market after the publication of a rating which was not specifically issued to support an impending IPO. Submitting the agency’s liability to the lex mercatus under such circumstances is admittedly dubious. Clearly, CRAs cannot anticipate the financial markets in which the rated issuer might seek or obtain admission to trading in the future. This is particularly true if the issuer does not communicate its refinancing intentions to the CRA at the conclusion of the rating contract. Similar difficulties arise when transactions are carried out on electronic trading venues on which the financial instruments can be traded on the mere initiative of financial firms or investors without the issuer’s application or permission¹⁰⁸ or outside any trading venue at all (so-called over-the-counter trading). Submitting the CRA’s liability towards investors to the law of the place where a transaction was carried out over the counter (OTC) or to the law of the country governing the alternative trading venue on which the transaction was made¹⁰⁹ would be inimical to the objectives of Rome II. This would not only make the risk of liability unpredictable for CRAs but would also lead to considerable uncertainty for investors because the location of the transaction, especially in the case of virtual trading platforms, might be difficult or impossible to verify.¹¹⁰

Where securities traded OTC (or on electronic trading venues without the issuer’s consent) are listed on a regulated market, a case could be made for applying the law of the country of the regulated market, based on the hypothesis that the “supra-individual” damage inflicted on the financial market by the rating was crucial. Alternatively, from an individualised notion of damage, one might argue, based on an overall assessment of the circumstances of the case, that the dispute was “manifestly more closely connected” with the country where the respective regulated market is situated, meaning that the law of this country applies pursuant to Article 4(3) Rome II. Supporting this, one may note that prices set in the regulated market impinge on transactions made on alternative trading venues or outside any trading venue at all, serving as a comparator for the prices paid outside the regulated market.¹¹¹ However, the “market rule” necessarily fails if the affected securities are not admitted to trading on any (regulated) financial market, which is often the case for structured finance products.¹¹² In these situations, it seems most appropriate to exceptionally apply the law of the country of the issuer’s headquarters by having recourse to Article 4(3) Rome II, as this solution provides legal certainty for all parties involved, ensures that there is at least a fairly close connection between the governing law and the dispute, and strikes a fair balance between CRAs and investors. While it could be objected that it would be fairer to investors to apply the law of the country where the respective structured finance products were offered or traded, this solution, like the alternative proposal to apply the law of the country where the investor is habitually resident, could lead to an uncontrollable fragmentation of the laws governing the CRA’s liability towards a multitude of investors given that such instruments can theoretically be traded anywhere in the world. Furthermore, an investor who seriously considers to buy a particular financial instrument can be expected, in her or his own interest, to access publicly available information on the issuer to assess its creditworthiness¹¹³ and should thus be able to know where that issuer has its registered office.

c) Conclusion

In conclusion, the “marketplace theory” of determining the law governing financial torts, which is generally consistent with the guiding principles of Rome II, must not be applied without reservation to disputes concerning investor claims against CRAs.¹¹⁴ It works well in a typical case in which the securities in question are already listed on a regulated market at the time of the publication of the rating, whether assigned to the issuer or its securities or where the rating is issued to support an IPO. By contrast, when the affected securities are not listed on a regulated market, at least not at the time of the publication of the rating, a default rule becomes essential that provides for legal certainty and corresponds to the principle of the closest connection. Applying the law of the issuer’s headquarters provides a convincing solution in these situations.

D. Prospects for reform

Against the background of this analysis, it cannot be denied that the EU framework for cross-border litigation concerning credit ratings requires reform. Legislative measures must not be taken in isolation; rather, a coordinated effort is required, consisting of specific amendments to the CRA Regulation as well as to Rome II and Brussels Ia.

1. Extending the territorial reach of the EU liability regime

First, regarding the liability regime of Article 35a CRA Regulation, it is not only necessary for the EU legislator to revise substantive liability issues (most importantly concerning the allocation of the burden of proof) but also to eliminate or at least limit excessive references to domestic law by autonomously defining the central terms of the damages claim. To create a truly uniform, comprehensive, and effective compensation regime for investors and issuers affected by credit ratings, it is, in view of the firmly entrenched oligopolistic structure of the rating market,¹¹⁵ equally important to appropriately extend the extra-territorial reach of the liability rule. Considering the “Big Three” and other certified CRAs intentionally offer their ratings for regulatory purposes within the EU, thereby potentially influencing investment decisions made in the European market, it becomes justifiable and wholly consistent with general principles of both private international law and public international law to subject these CRAs to the same harmonised minimum standard of liability as CRAs registered in the EU.¹¹⁶

To this end, it is neither necessary nor advisable to extend the scope of the entire CRA Regulation to third-country CRAs. Regarding third-state CRAs making use of the endorsement mechanism of Article 4(3) CRA Regulation, it would be sufficient to amend Article 4(5) CRA Regulation, stipulating that the issuing third-country CRA and the endorsing European CRA bear equal responsibility for the compliance of the endorsed rating; consequently, the parent company established overseas and their European subsidiary could be held jointly and severally liable for infringements of the CRA Regulation under the conditions of Article 35a CRA Regulation. Regarding certified CRAs, a new paragraph could be included in Article 35a CRA Regulation, according to which infringements of the relevant third-country regulatory framework shall be deemed equivalent to the violations of the CRA Regulation listed in its Annex III.

2. Adopting a special conflicts rule for torts related to financial markets regulation

Regarding the determination of the applicable national law, this article has argued that it is already possible to submit CRAs’ liability towards the investor public to the law of the country of the affected financial market by way of a purposive interpretation of the notion of “damage” in the sense of Article 4(1) Rome II. Although this market-centred approach generally strikes a reasonable balance between the parties, Rome II, in its current form, does not provide an entirely satisfactory framework for financial torts, and, particularly, violations of the CRA Regulation. First, with regard to the fact that the regulatory requirements imposed by financial markets law, especially, the CRA Regulation, and also, largely, the corresponding civil liability rules are mandatory in nature, designed to ensure not only the protection of investors but also the stability and integrity of financial markets,¹¹⁷ it seems dubious to generally allow the parties to derogate from the objectively applicable law in accordance with Article 14 Rome II. During a future revision of Rome II, party autonomy should be excluded with regard to financial torts, in line with the approach adopted for competition law (Article 6(4) Rome II), at least insofar as a party choice before the harmful event giving rise to the damage, that is, the infringement of financial market regulation, is concerned.¹¹⁸

Furthermore, in light of the fact that violations of capital markets law and, particularly, the publication of defective credit ratings assigned to internationally traded securities are apt to affect a multitude of investors, thereby causing scattered damage, the general priority attached to the law of the country of the common habitual residence (Article 4(2) Rome II) seems particularly inappropriate in the present context, as it leads to arbitrary discrimination between investors:¹¹⁹ In fact, it is hard to see why investors habitually resident in the CRA’s home country should be better or worse off than other investors. Another drawback of the general conflicts rule is its insufficient flexibility. Although it is possible to displace the law designated in Article 4(1) or (2) Rome II under the stringent conditions of Article 4(3) Rome II, it would be preferable to apply the law of the country of the financial market where the affected securities are listed subject to an express foreseeability criterion, similar to the one included in the conflicts rule for product liability (Article 5(1) final paragraph Rome II), given that CRAs and other financial players will not always be able to anticipate in which markets the securities affected by the alleged violation of financial markets law might be traded.

In view of the above, it can only be hoped that the EU legislator, following a thorough revision of Rome II, finally introduces a special conflicts rule for non-contractual obligations arising from infringements of capital markets law, thereby ending the persistent uncertainty regarding the identification of the law governing financial torts. To this end, inspiration could be drawn from the draft proposal submitted by the German Council for Private International Law,¹²⁰ which, broadly in line with the approach advocated here, lays down a general rule tying liability for financial torts to the country of the affected regulated market, coupled with special rules for cross-listings and transactions made outside regulated markets as well as a default rule, based on the principle of the closest connection, an escape clause, and a special provision inspired by Article 6(3)(b) Rome II allowing the harmed party to opt for the application of the lex fori in case that the affected securities are listed on several financial markets, including the one of the forum State and that this market was substantially affected by the respective breach of financial markets law.

3. Enhancing investors’ access to justice

What is particularly unfortunate about the existing EU private international framework for disputes concerning damage caused by credit ratings is that only proceedings brought against CRAs established in the EU are subject to uniform jurisdictional rules throughout the EU. The corollary is that, on the one hand, harmed (European) investors and issuers may be left without recourse to Member State courts even if the damage occurred within the EU, while, on the other hand, third-country CRAs face considerable uncertainty as to whether courts in the EU might assert jurisdiction over them in accordance with domestic law.¹²¹ In light of this, it should be seriously considered to extend the special grounds of jurisdiction of Articles 7 and 8 Brussels Ia to non-EU domiciliaries and provide for a subsidiary ground of jurisdiction and/or a forum necessitatis within the EU for exceptional cases in the course of a future reform of Brussels Ia.¹²²

However, to truly promote private enforcement of the common regulatory requirements placed on CRAs and enhance investors’ access to justice, it is not sufficient to bring third-country CRAs into the purview of the EU jurisdictional framework and extend the extra-territorial reach of the EU liability regime of Article 35a CRA Regulation. Since retail investors are, as previous experience shows, frequently dissuaded from enforcing claims individually because of the associated costs and risks of (cross-border) litigation, it is equally necessary to consider further legislative actions aimed at promoting and improving collective redress in financial tort cases at the EU level.¹²³ One possible approach is to include the CRA Regulation within the list of Directives and Regulations in Annex I of the Representative Actions Directive.¹²⁴ This inclusion would enable consumer associations and other qualified entities to initiate (cross-border) representative actions against CRAs for injunctive and/or redress measures on behalf of multiple investors in the same court.

E. Concluding remarks

While the introduction of a civil liability rule for CRAs during the second amendment of the CRA Regulation marked the first step towards transposing the EU’s policy of strengthening enforcement mechanisms and leveraging sanctioning power for infringements of the unified regulatory framework for credit ratings through civil litigation, the need for a reform of the EU liability regime has become evident, considering its implications for cross-border disputes. Clearly, it is necessary to address all matters related to the substantive law level once again, aiming to effectively enable investors and issuers to enforce CRAs’ obligations towards them without subjecting CRAs to excessive liability risks. Furthermore, because the international rating market continues to be dominated by the “Big Three”, with European agencies still lagging considerably behind, the EU legislator would be well advised to finally tackle the private international law issues of cross-border disputes concerning credit ratings by way of a coherent strategy of reforming Brussels Ia and Rome II, with regard to the proposals submitted in this article.

Disclosure statement

No potential conflict of interest was reported by the author(s).

Notes

1 See, generally, F Partnoy, “How and Why Credit Rating Agencies are Not Like Other Gatekeepers”, University of San Diego, School of Law, Legal Studies Research Paper Series, Research Paper No. 07-46 May 2006, 59–99; S Schwartz, “Private Ordering of Public Markets: The Rating Agency Paradox” (2002) 14 University of Illinois Law Review 1, 6–9; for a closer analysis of financial gatekeepers and gatekeeper liability, see RH Kraakman, “Gatekeepers: The Anatomy of a Third-Party Enforcement Strategy” (1986) 2 Journal of Law, Economics & Organization 53–104.

2 For an account of the “issuer pays” model, see C Bush, “Dealing with the Conflicts of Interest of Credit Rating Agencies: A Balanced Cure for the Disease” (2022) 17 Capital Markets Law Journal 334, 336–38.

3 See Bush, supra n 2, 337.

4 See only Schwartz, supra n 1, 8.

5 K Dennis, “The Ratings Game: Explaining Rating Agency Failures in the Build Up to the Financial Crisis” (2009) 63 University of Miami Law Review 1111, 1129–30.

6 Regulation (EU) No 575/2013 of the European Parliament and of the Council of 26 June 2013 on prudential requirements for credit institutions and investment firms and amending Regulation (EU) No 648/2012, [2013] OJ L176/1.

7 Schwartz, supra n 1, 3–4.

8 See the Declaration on Strengthening the Financial System, London Summit – April 2, 2009, https://g7g20-documents.org/database/document/2009-g20-united-kingdom-leaders-leaders-language-london-summit-leaders-statement accessed on 30 July 2023.

9 For a closer analysis of the role of CRAs in the evolution of the financial crisis, see, eg, JC Coffee Jr., “Ratings Reform: The Good, the Bad, and the Ugly” (2011) 1 Harvard Business Law Review 231, 236–46; D Darcy, “Credit Rating Agencies and the Credit Crisis: How the “Issuer Pays” Conflict Contributed and What Regulators Might Do about It” (2009) Columbia Business Law Review 605, 613–22; Dennis, supra n 5, 1133–44.

10 See only Coffee, supra n 9, 1412–13; for a detailed account of CRAs’ failures, see The Financial Crisis Inquiry Commission, The Financial Crisis Inquiry Report: Final Report of the National Commission on the Causes of the Financial and Economic Crisis in the United States (January 2011) 118–126, 146–155, https://www.govinfo.gov/app/details/GPO-FCIC accessed on 30 July 2023.

11 Dodd-Frank Wall Street Reform and Consumer Protection Act, Pub. L. No. 111–203, 124 Stat. 1376 (21 July 2010).

12 The term “NRSROs” denotes credit rating agencies registered and approved by the Securities and Exchange Commission (SEC); the list includes, at present, 10 NRSROs, see https://www.sec.gov/about/divisions-offices/office-credit-ratings/current-nrsros accessed on 30 July 2023.

13 See Bush, supra n 2, 343–45.

14 Regulation (EC) No 1060/2009 of the European Parliament and of the Council of 16 September 2009 on credit rating agencies, [2009] OJ L302/1.

15 For an overview of the amended Regulation see Bush, supra n 2, 345–62.

16 For a detailed analysis, see C Picciau, “The Evolution of the Liability of Credit Rating Agencies in the United States and in the European Union: Regulation after the Crisis” (2018) 15 European Company and Financial Law Review 339, 356–401; on the concept and typology of “private attorney generals” see, especially, WB Rubenstein, “On What a Private Attorney General Is – And Why It Matters” (2004) 57 Vanderbilt Law Review 2129–2173; BG Garth, IH Nagel and S Plager, “The Institution of the Private Attorney General: Perspectives from an Empirical Study of Class Action Litigation” (1988) 61 Southern California Law Review 353–98.

17 Regulation (EU) No 462/2013 of the European Parliament and of the Council of 21 May 2013 amending Regulation (EC) No 1060/2009 on credit rating agencies, [2013] OJ L146/1.

18 On this much-discussed liability regime, see M Lehmann, “Civil liability of rating agencies — an insipid sprout from Brussels” (2016) 11 Capital Markets Law Journal 60, 73–83; C Picciau, supra n 16, 384–394; for a detailed analysis, see V Wimmer, Auswirkungen des Article 35a der Verordnung (EU) Nr. 462/2013 auf die zivilrechtliche Haftung von Ratingagenturen (Nomos Verlagsgesellschaft, 2017), 63–245. In line with the EU approach to civil liability, the Dodd-Frank Act subjected CRAs to the same standards of liability as auditors and securities analysts by eliminating exemptions previously applied to CRAs on specific statutory liability grounds, namely, liability for fraudulent or deceptive acts or omissions in connection with the purchase or sale of securities, pursuant to Sec. 10b of the Securities Exchange Act 1934, and liability for false registration statements, pursuant to Sec. 11 of the Securities Act 1933; for an account of the legislative amendments concerning liability for ratings and the ensuing U.S. court case law, see F Partnoy, “What’s (Still) Wrong with Credit Ratings?” (2017) 92 Washington Law Review 1407, 1433–45.

19 See M Gietzelt and J Ungerer, “Die neue zivilrechtliche Haftung von Ratingagenturen nach Unionsrecht” (2013) 10 Zeitschrift für das Privatrecht der Europäischen Union 333, 337; Wimmer, supra n 18, 395.

20 See, eg, U Schroeter, Ratings – Bonitätsbeurteilungen durch Dritte im System des Finanzmarkt-, Gesellschafts- und Vertragsrechts (Mohr Siebeck, 2014), 952–955; B Steinrötter, “Zuständigkeits- und kollisionsrechtliche Implikationen des europäischen Haftungstatbestands für fehlerhaftes Rating” (2015) Zeitschrift für Wirtschaftsrecht 110, 116; Wimmer, supra n 18, 412–16.

21 Schroeter, supra n 20, 949–951; T Möllers and C Niedorf, “Regulation and Liability of Credit Rating Agencies – A More Efficient European Law?” 2014 (10) European Company and Financial Law Review 333, 347–48.

22 See Picciau, supra n 16, 387–91.

23 Möllers and Niedorf, supra n 21, 347.

24 See, critically, Lehmann, supra n 18, 76–78.

25 Ibid.

26 See, eg, A Dutta “Die neuen Haftungsregeln für Ratingagenturen in der Europäischen Union: Zwischen Sachrechtsvereinheitlichung und europäischem Entscheidungseinklang” (2013) Zeitschrift für Wirtschafts- und Bankrecht 1729, 1732; Gietzelt and Ungerer, supra n 19, 339; Schroeter, supra n 20, 839; doubted by Lehmann, supra n 18, 81–82.

27 Lehmann, supra n 18, 81.

28 Ibid., 73–74.

29 See Recital 48 Regulation (EU) No 462/2013.

30 See P Leyens in CH Seibt, P Buck-Heeb and R Harnos (eds) BeckOK Wertpapierhandelsrecht (CH Beck, 5th edn, 2022), Article 1 Regulation (EC) No 1060/2009 mn 32.

31 See Dutta, supra n 26, 1732; U Schroeter, “Grenzüberschreitende Verhaltenspflichten und Haftung von Rating-Agenturen” in D Zetsche and M Lehmann (eds), Grenzüberschreitende Finanzdienstleistungen (Mohr Siebeck, 2018), 382.

32 See, critically, Lehmann, supra n 18, 81.

33 The “Big Three” accounted for 94.7% of all the ratings outstanding in 2020 as between NRSROs, see SEC, Office of Credit Ratings, Annual Report on Nationally Recognised Statistical Rating Organisations, as required by Section 6 of the Credit Rating Agency Reform Act of 2006, January 2022, 24 (https://www.sec.gov/page/office-credit-ratings-releases-annual-report, accessed 30 July 2023); the market share of the “Big Three” of EEA-30 ratings in 2022 was estimated to be 69%, see ESMA, Market Report on EU Credit Ratings Market 2023, ESMA50-165-2477, 8 (https://www.esma.europa.eu/document/market-report-eu-credit-ratings-market-2023, accessed 30 July 2023).

34 See supra A. 3.

35 For more detail, see infra C. 3.

36 See, eg, Lehmann, supra n 18, 79–81.

37 Regulation (EC) No 864/2007, [2007] OJ L199/40.

38 Regulation (EU) No 1215/2012, [2012] OJ L351/1.

39 On this, see, eg, L van Bochove, “Purely Economic Loss in Conflict of Laws: The Case of Tortious Interference with Contract” (2016) 34 Nederlands Internationaal Privaatrecht 456–465; TC Hartley, “Jurisdiction in Tort Claims for Non-Physical Harm under Brussels 2012, Article 7(2)” (2018) 67 International and Comparative Law Quarterly 987–1003; M Lehmann, “Where Does Economic Loss Occur?” (2011) 7 Journal of Private International Law 527–50.

40 See, only, Dutta, supra n 26, 1729.

41 See, especially, N Nisi, “La guirisdizione in materia di responsibilità delle agenzie di rating alla luce del regolamento Buxelles I” (2013) 49 Rivista di diritto internazionale privato e processuale 385–418; A Dutta, “Die Haftung amerikanischer Ratingagenturen in Europa – Die Rolle des internationalen Privatrechts” (2014) 34 Praxis des Internationalen Privat- und Verfahrensrechts 33–41; H Meyle, Reine Vermögensschäden im Europäischen Internationalen Deliktsrecht: Zuständigkeit und anwendbares Recht (Duncker & Humblot, 2021), 224–43.

42 Topic XXVI “The Liability of Credit Rating Agencies” of the XXIth World Congress of the International Academy of Comparative Law, Asunción, Paraguay (2022), general rapporteur: P Leyens; an edited volume is expected to be published by Brill by the end of 2024.

43 See P Leyens, “Liability of Credit Rating Agencies: General Report” (draft report, 15 August 2022), section 2 (case law overview), 10–17, and section 3 (legal bases of liability), 17–30.

44 See Dutta, supra n 41, 36. Notably, the special protective jurisdiction for consumers of Article 18(1) Brussels Ia does not apply, at least in case of solicited ratings, given that there are no contractual relations between CRAs and ordinary retail investors, as required by Article 17(1) Brussels Ia; the same applies regarding unsolicited ratings because the subscribers of such ratings are usually only institutional investors.

45 There are currently only three CRAs certified in accordance with Article 5 CRA Regulation, namely, Egan-Jones Ratings Co., HR Ratings de México, S.A. de C.V., and the Japan Credit Rating Agency Ltd.; see the list of certified CRAs provided by the ESMA in accordance with Article 18(3) CRA Regulation, https://www.esma.europa.eu/credit-rating-agencies/cra-authorisation accessed on 31 July 2023.

46 Gietzelt and Ungerer, supra n 19, 339.

47 See Steinrötter, supra n 20, 112.

48 See Schroeter, supra n 31, 375.

49 According to settled case law, a third party is not bound by a jurisdiction agreement concluded between other parties unless it had succeeded to all the rights and obligations of one of the original parties under the applicable national law or if it consented to the choice-of-court agreement; see CJEU Case C-543/10 Refcomp ECLI:EU:C:2013:62, [29]; Case C-519/19 Ryanair v DelayFix ECLI:EU:C:2020:933, [42], [46]–[47].

50 While there are still some uncertainties concerning the delineation of the mutually exclusive bases of jurisdiction of Articles 7(1) and 7(2) Brussels Ia, the CJEU has consistently emphasised that the notion of “contract” covered only situations where one party freely assumed an obligation towards another; see only Case C-26/91 Jakob Handte v TMCS ECLI:EU:C:1992:268, [15].

51 CJEU Case C-189/87 Kalfelis v Schröder and Others ECLI:EU:C:1988:459, [17].

52 This is settled since CJEU Case 21/76 Bier (Mines de Potasse d’Alsace) ECLI:EU:C:1976:166.

53 See only CJEU Case C-194/16 Bolagsupplysningen and Ilsjan ECLI:EU:C:2017:766, [27]–[28] and the case law cited.

54 In the same sense Nisi, supra n 41, 399–403; Schroeter, supra n 31, 376.

55 P Mankowski, in U Magnus and P Mankowski (eds), European Commentaries on Private International Law, Vol. 1: Brussels Ia Regulation (Otto Schmidt, first edn, 2016), Article 7 Brussels Ia mn 298.

56 See, generally, E Lein in A Dickinson and E Lein (eds), Brussels Ia Regulation (Oxford University Press, 2015), [4.90].

57 On this, see also Nisi, supra n 41, 406–15.

58 See infra C. 3.

59 Cass., 22.3.2012, n. 8076, (2013) 49 Rivista di diritto internazionale privato e processuale 431, 432–33.

60 Case C-709/19 Vereniging van Effectenbezitters v BP ECLI:EU:C:2021:377.

61 See infra C. 3. c).

62 See Dutta, supra n 41, 36.

63 The locus damni provides a ground for international and territorial jurisdiction in most national legal systems within the EU, except in Austria (in cases where the alleged damage is merely financial), the Netherlands, and Greece. See T Lutzi, E Piovesani and Dora Zgrabljić Rotar, “Comparative Report”, in T Lutzi, E Piovesani and Dora Zgrabljić Rotar (eds), Jurisdiction over Non-EU Defendants: should the Brussels Ia Regulation be extended? (Bloomsbury, 2023), 21–22.

64 See supra B. 1.

65 See BGH 13.12.2012–3 ZR 282/11, (2013) Neue Juristische Wochenschrift 386, [19].

66 Lutzi, Piovesani and Zgrabljić Rotar, supra n 63, 11–14, mention Austria, Germany, Latvia, Lithuania, and Poland.

67 See Shaffer v Heitner, 433 U.S. 186 (1977) according to which a State may only exercise in personam jurisdiction over non-domiciliaries in accordance with the “minimum contacts” test of International Shoe Co. v Washington, 326 U.S. 310 and that the mere presence of the defendant’s property in the forum State alone, absent other ties among the defendant, the State, and the litigation, did not satisfy this test but violated the due process clause.

68 Pursuant to Section 4(c)(8) Uniform Foreign-Country Money Judgments Recognition Act 2005, which has been enacted in 30 States including New York.

69 Schroeter, supra n 31, 380.

70 Dutta, supra n 41, 40; but cf. Gietzelt and Ungerer, supra n 19, 338; M Lehmann, “Private international law and finance: nothing special?” (2018) 36 Nederlands Internationaal Privaatrecht 1, 21 n 86.

71 Regulation (EC) No 593/2008, [2008] OJ L177/6.

72 This concept is, inter alia, known in Austrian, Estonian, German, and Swiss law; see P Mankowski in U Magnus and P Mankowski (eds), European Commentaries on Private International Law Vol. III: Rome II Regulation (Otto Schmidt, 2019), Article 1 Rome II mn 63.

73 See, in more detail, Leyens, supra n 43, 17–30.

74 See A Dickinson, The Rome II Regulation: The Law Applicable to Non-Contractual Obligations (Oxford University Press, 2008), [3.34]–[3.35], [3.64].

75 In the same sense, see Dutta, supra n 26, 1731.

76 On the demarcation of the bases of jurisdiction of Articles 7(1) and 7(2) Brussels Ia regarding claims between contracting parties, see CJEU, Case C-59/19 Wikingerhof GmbH & Co. KG v Booking.com BV ECLI:EU:C:2020:950.

77 For a closer analysis, see A Dutta, “Das Statut der Haftung aus Vertrag mit Schutzwirkung für Dritte” (2009) 29 Praxis des Internationalen Privat- und Verfahrensrechts 293–99.

78 Dutta, supra n 77, 297–99; contra Schroeter, supra n 31, 397.

79 See Mankowski, supra n 72, Article 1 Rome II mn 63.

80 Dutta, supra n 77, 297.

81 Ibid.

82 Schroeter, supra n 31, 389.

83 While U.S. courts had previously frequently held that credit ratings were protected as free speech (see, eg, In re Enron Corp. Sec., Derivative & “ERISA” Litig., 511 F. Supp. 2d 742, 819–27 (S.D. Tex. 2005)), the picture seems to have changed following the financial crises (see Abu Dhabi Commercial Bank v Morgan Stanley & Co., 651 F. Supp. 2d 155, 176 (S.D.N.Y. 2009), holding that the ratings in question, which were made accessible only to a select group of investors, were actionable misrepresentations and not mere opinions, while leaving open whether different considerations apply where ratings are disseminated to the public at large); for an overview of the relevant U.S. case law, see Partnoy, supra n 18, 1442–45.

84 In the same sense Schroeter, supra n 31, 387–88.

85 See F Maultzsch in C Budzikiewicz, MP Weller and W Wurmnest (eds) beck-online.Grosskommentar, Rom II-VO (CH Beck, 2023) Article 16 Rome II mn 35–49 with further references (also to differing views).

86 See Maultzsch, supra n 85, Article 16 Rome II mn 45–46.

87 See, eg, A Halfmeier, “Liability of Rating Agencies under German and European Law” in P Rott (ed), Certication – Trust, Accountability, Liability (Springer, 2019), 231, 236.

88 A Dutta, supra n 41, 39; B Haar, “Neues zur Haftung von Ratingagenturen im Zuge der zweiten Novelle der Rating-Verordnung (CRA III)?” (2013) Der Betrieb 2489, 2954; see also, as far as publicly accessible credit ratings are concerned, Schroeter, supra n 31, 401.

89 Steinrötter, supra n 20, 115.

90 T Dornis in C Budzikiewicz, MP Weller and W Wurmnest (eds) beck-online.Grosskommentar, Internationales Gesellschaftsrecht (CH Beck, 2022), Internationales und europäisches Finanzmarktrecht, mn 701; see also, from a de lege ferenda perspective, S Corneloup, “Rome II and the Law of Financial Markets: The Case of Damage Caused by the Breach of Disclosure” in A Nuyts and N Hatzimihail (eds), Cross-Border Class Actions: The European Way (Sellier, 2014), 291, 313.

91 See, eg, T Arons, “‘All Roads Lead to Rome’: Beware of the Consequences! The Law Applicable to Prospectus Liability Claims under the Rome II Regulation” (2008) 26 Nederlands Internationaal Privaatrecht 481, 486; D Einsele, “Kapitalmarktrecht und Internationales Privatrecht” (2017) 81 The Rabel Journal of Comparative and International Private Law 781, 787–93, 812–13; F Garcimartín Alférez, “The Law Applicable to Prospectus Liability in the European Union” (2011) 5 Law and Financial Markets Review 449, 453; Herbert Kronke, “Capital Markets and Conflict of Laws” (2000) 286 Recueil des cours 245, 308–12; M Lehmann, “Prospectus liability and private international law – assessing the landscape after the CJEU’s Kolassa ruling (Case C-375/13)” (2016) 12 Journal of Private International Law 318, 339–42.

92 In the same sense Lehmann, supra n 18, 79–80.

93 See Case C-168/02 Kronhofer v Maier ECLI:EU:C:2004:364, [19]–[21].

94 VEB, supra n 60, [35].

95 As to the objectives of Rome I, see, generally, Dickinson, supra n 74, [3.13]–[3.30].

96 See also Lehmann, supra n 18, 80.

97 Ibid.

98 See the Commission’s Proposal, COM/2003/0427 final, 12, where it is made abundantly clear that the escape clause shall only apply in exceptional cases.

99 See the reservations expressed by M Lehmann, “Vorschlag für eine Reform der Rom II-Verordnung im Bereich der Finanzmarktdelikte” (2012) 32 Praxis des Internationalen Privat- und Verfahrensrechts 399, 404.

100 See also Corneloup, supra n 90, 311–14.

101 In the same sense Corneloup, supra n 90, 313.

102 See, generally, C Thomale, “Internationale Kapitalmarktinformationshaftung” (2020) 49 Zeitschrift für Unternehmens- und Gesellschaftsrecht 332, 346–47.

103 In this sense Garcimartín Alférez, supra n 91, 453.

104 To this avail Dornis, supra n 90, Internationales und europäisches Finanzmarktrecht mn 658–60.

105 In the same sense M Lehmann, “A new piece in the puzzle of locating financial loss: the ruling in VEB v BP on jurisdiction for collective actions based on deficient investor information” (2022) 18 Journal of Private International Law 1, 10–11.

106 See Kronke, supra n 90, 311; Thomale, supra n 102, 347.

107 Lehmann, supra n 99, 404.

108 This applies to some particular Multilateral Trading Facilities (MTF) and Organised Trading Facilities (OTF), both of which operate exclusively electronically, eg, the “Open Market” at the Frankfurt stock exchange; see Lehmann, supra n 105, 17–18.

109 Presumably the law of the country where the operator of the electronic trading venue has its seat; see Thomale, supra n 102, 342.

110 F Rieländer, “Financial torts and EU private international law: will the search for the place of “financial damage” ever come to an end?” (2022) 18 Journal of Private International Law 28, 52.

111 Thomale, supra n 102, 343.

112 See Meyle, supra n 41, 239.

113 See Article 5(1) CRA Regulation.

114 Similarly, see Corneloup, supra n 90, 313.

115 See supra A. 4.

116 In the same sense Wimmer, supra n 18, 418–20.

117 See, generally, M Siems, “The EU Market Abuse Directive: A Case-Based Analysis” (2008) 2 Law and Financial Markets Review 39, 42.

118 Corneloup, supra n 90, 308.

119 See also Einsele, supra n 90, 787–88.

120 The draft proposal for a special conflicts rule for financial torts by the German Council on Private International Law has been published in (2012) 32 Praxis des Internationalen Privat- und Verfahrensrechts 470. For a closer analysis of the proposal, see M Lehmann, “Proposition d’une règle spéciale dans le Règlement Rome II pour les délits financiers” (2012) Revue critique de droit international privé 485, 504–19.

121 See supra B. 2.

122 See B Hess, “Reforming the Brussels Ibis Regulation: Perspectives and Prospects” (2021) 4 Max Planck Institute Luxembourg for Procedural Law Research Paper Series 1, 6–7.

123 See C Uhlmann, “Interessenkonflikte bei Wirtschaftsprüfern und Ratingagenturen” (2021) 185 Zeitschrift für das gesamte Handelsrecht und Wirtschaftsrecht 669, 720–22.

124 Directive (EU) No 2020/1828 of the European Parliament and of the Council of 25 November 2020 on representative actions for the protection of the collective interests of consumers and repealing Directive 2009/22/EC, [2020] OJ L409/1.