High Court allows proportionate liability appeal

Insurance eBulletin - 5 April 2013

Summary

On 3 April 2013, a 3:2 majority of the High Court of Australia allowed an appeal from the decision of the New South Wales Court of Appeal in Mitchell Morgan Nominees Pty Ltd & Anor v Vella & Ors1 which had significantly narrowed the scope of the definition of "concurrent wrongdoer" in s 34(2) Civil Liability Act 2002 (NSW) (CLA). 

The Court of Appeal found that a firm of solicitors who had failed to draft an adequate security document were unable to confine their liability for a lender's loss by reference to the conduct of fraudsters who had procured the loan, because the solicitors and fraudsters had not caused the same "damage or loss". 

The High Court reinstated the trial judge's decision that the solicitors were entitled to the benefit of proportionate liability because they were in fact a "concurrent wrongdoer" with the fraudsters. All members of the High Court agreed that concurrent wrongdoers must be liable for the same damage or loss but split 3:2 on the more critical issue of how that damage or loss should be determined.

 

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Background

Proportionate liability allows a defendant to an "apportionable claim" to limit their liability for damage or loss if they can establish that they are a "concurrent wrongdoer".

"Concurrent wrongdoer" is defined in section 34(2) of the CLA as:

"In this Part, a concurrent wrongdoer, in relation to a claim, is a person who is one of two or more persons whose acts or omissions (or act or omission) caused, independently of each other or jointly, the damage or loss that is the subject of the claim."

All Australian states and territories have some form of proportionate liability scheme as does the Commonwealth for certain statutory claims for misleading and deceptive conduct.2  The schemes are not uniform but all, except South Australia, adopt a similar definition of "concurrent wrongdoer".

 

Facts

A fraudster obtained certificates of title from a landowner and, in conjunction with his cousin, a solicitor, forged and dishonestly witnessed signatures on loan documents in the landowner's name. Hunt & Hunt prepared the loan and mortgage documents on behalf of the lender, Mitchell Morgan Nominees Pty Ltd (Mitchell Morgan), which advanced $1,001,748.85 to a joint bank account held by the landowner and one of the fraudsters. The fraudster subsequently forged the landowner's signature at the bank and made off with the contents of the joint account.

Mitchell Morgan was not able to recover the loan funds from the landowner, because there was no valid loan agreement with him, nor was it able to execute on the mortgage because it had been drafted in such a way by Hunt & Hunt, that it secured nothing.
Mitchell Morgan claimed its loss from Hunt & Hunt on the basis that they had breached an implied term of their retainer to exercise proper skill, diligence and care in securing the loan. Hunt & Hunt denied liability, but in the alternative sought to limit their liability under Part 4 of the CLA alleging that the fraudsters were concurrent wrongdoers.

 

Trial judgment

The trial judge3 held that Hunt & Hunt were liable to Mitchell Morgan, having negligently drafted the mortgage, however that liability could be limited by reference to Part 4 of the CLA because:

  • Mitchell Morgan's claim was an "apportionable claim" by virtue of section 34(1)(a) of the CLA; and 
  • Hunt & Hunt were "concurrent wrongdoers" for the purposes of section 34(2) of the CLA with the fraudsters, because they were: a person who is one of two or more persons whose acts or omissions (or act or omission) caused, independently of each other or jointly, the damage or loss that is the subject of the claim.

The acts of the fraudsters were also considered to have caused Mitchell Morgan's loss, indeed, to have been the major contributor to it and Hunt & Hunt's liability was reduced to its "just" proportion, considered by the trial judge to be 12.5%, of Mitchell Morgan's claim pursuant to section 35(1) of the CLA.4

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Court of Appeal

A Full Bench the New South Wales Court of Appeal upheld Mitchell Morgan's appeal.5  It found that Hunt & Hunt was not a concurrent wrongdoer because the acts of the fraudsters did not cause the same damage that was the subject of Mitchell Morgan's claim against it.

The Court of Appeal characterised the loss or damage caused to Mitchell Morgan by the fraudsters as Mitchell Morgan being fraudulently induced to pay out money that it would not otherwise have paid. By contrast, the Court of Appeal characterised the loss or damage caused by Hunt & Hunt's negligence as Mitchell Morgan not having the benefit of security for the money it paid. These losses or damage were not the same, and since the fraudsters had done nothing to cause Hunt & Hunt to draft the mortgage negligently, their actions could not be brought into the mix.

Hunt & Hunt were therefore found responsible for Mitchell Morgan's entire loss.

 

High Court

The High Court upheld Hunt & Hunt's appeal by a 3:2 majority and reinstated the trial judge's finding that it ought only be liable for 12.5% of Mitchell Morgan's loss.

All members of the High Court agreed that concurrent wrongdoers have to have caused the same damage or loss that is the subject of an apportionable claim. They differed however on the characterisation of the damage or loss that was the subject of Mitchell Morgan's claim. The majority found that the Court of Appeal's analysis of the damage or loss was incorrect, whereas the dissenting judgment agreed with the Court of Appeal's analysis.

The majority

a) Damage or loss subject of the claim

The majority identified the damage or loss as Mitchell Morgan's inability to recover monies advanced.

By way of general guidance, the majority reiterated the difference between 'damages' finally awarded, and 'damage', the latter being the injury suffered and its foreseeable consequences. It is 'damage' or 'harm' to an interest which must be identified for the purposes of s 34(2) of the CLA. In the context of economic loss, this may be understood as the 'harm suffered to a plaintiff's economic interests.'

It was found not to matter that the causes of action that Mitchell Morgan had against the various wrongdoers may have been different. What mattered was whether those actions were founded on its inability to recover the monies advanced.  If the acts or omissions of the various wrongdoers were a material cause of Mitchell Morgan's inability to recover the monies advanced, that was sufficient for them to be considered concurrent wrongdoers.

The conduct of the fraudsters was a material cause of this loss, as Mitchell Morgan would not have lent the monies and taken a mortgage had they not been induced to do so by the fraudsters. Hunt & Hunt's conduct in drafting an ineffective security was also a material cause of the same loss.

The approach taken by the Court of Appeal in identifying two different losses or damage, i.e. not having the benefit of adequate security (Hunt & Hunt damage) and lending money in circumstances where it would not ordinarily be lent (fraudster damage) was incorrect because it equated the immediate effect of the relevant acts or omissions with the damage or loss.

The majority held that while those immediate effects (ineffective security and the fraudulent loan) were relevant in a purely causal sense to Mitchell Morgan's damage or loss, they were not to be equated with the damage or loss (the harm to Mitchell Morgan's economic interest in recouping the loan).

The majority reiterated that both Part 4 and the common law allow for situations where wrongdoers' acts are independent of one another but causative of the same damage. In this regard, the majority considered the hypothetical example raised by Nettle JA in the decision of the Victorian Court of Appeal in St George Bank Limited v Quinerts Pty Ltd6(Quinerts). The analogy given was a thief stealing money from a bank and a negligent broker failing to arrange insurance to cover theft. Nettle JA opined that the thief caused the damage of the bank's loss of money, independently of the insurance broker's negligence. The damage caused by the insurance broker was different, namely, the bank's inability to obtain indemnity from its insurer. The majority appeared to reject this characterisation of loss and damage. It found that in the analogy, the harm to the bank's economic interests, at a certain point, is the inability to recover from either the thief or the insurance company.

b) Causation

The question of causation for the Court was whether, for the purposes of section 34(2) of the CLA, the fraudsters' acts caused Mitchell Morgan's inability to recover the monies advanced, independently of Hunt & Hunt's causative conduct.

The majority emphasised that there is no requirement that each wrongdoer must have contributed to the wrongful acts of another wrongdoer in order for them to have caused the same damage or loss.

In this case, the harm suffered by Mitchell Morgan had more than one cause. Hunt & Hunt materially contributed to that harm by failing to draft an effective security. The fraudsters also materially contributed to the harm by inducing Mitchell Morgan to enter a fraudulent loan.

The minority

The minority agreed with the majority that concurrent wrongdoers are people who have caused the same damage or loss that is the subject of an apportionable claim however they adopted the Court of Appeal's characterisation of that damage or loss. As such, they held that the damage or loss for which Hunt & Hunt was responsible was not the same as that caused by the fraudsters.

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Implications

The High Court's decision is very good for professional indemnity insurers as the New South Wales Court of Appeal's decision significantly reduced the operation of legislation which was enacted specifically to benefit professionals and aimed to increase the availability of affordable professional indemnity insurance.

The majority's characterisation of the damage or loss claimed by the lender makes it easier for a professional involved in a loan transaction to contain their liability, at least in situations where there are other negligent or fraudulent participants in the loan transaction.

The Court of Appeal's analysis of "damage or loss" was based on the judgment of the Victorian Court of Appeal in Quinerts, which involved a negligent valuer who tried, unsuccessfully, to limit its liability to a lender by reference to the acts or omissions of a defaulting borrower and guarantor because the losses or damage caused by each were not the same. This analysis was regarded by the majority of the High Court as flawed. This may have broader implications in cases involving defaulting borrowers and negligent professionals.

On the majority's analysis, both a negligent valuer and a defaulting borrower/guarantor may be said to have harmed the same economic interest i.e. recoupment of monies advanced, however an issue remains as to whether, as the minority pointed out, "a failure to discharge an obligation to pay under a loan or a guarantee might be said to have caused "damage or loss" to a lender".

The High Court has left resolution of that issue for another day.

Authors
Kate Clark | Special Counsel
Reiteke Grosser | Graduate

 

Further information


1  [2011] NSWCA 390.

2  Wrongs Act 1958 (Vic), Pt IVAA; Law Reform (Contributory Negligence and Apportionment of Liability) Act 2001 (SA), Pt 3; Civil Liability Act 2003 (QLD), Ch 2, Pt 2; Civil Liability Act 2002 (WA), Pt 1F; Civil Liability Act 2002 (Tas), Pt 9A; Proportionate Liability Act 2005 (NT); Civil Law (Wrongs) Act 2002 (ACT), Ch 7A; ASIC Act 2001 (COM), Part 2 Div 2 Subdiv GA; Corporations Act 2001(COM), Part 7.10 Div 2A; Competition & Consumer Act 2010 (COM) Part VIA.

3  Vella v Permanent Mortgages Pty Ltd [2008] NSWSC 505

4  Section 35(1) provides "(a) the liability of a defendant who is a concurrent wrongdoer in relation to [an apportionable] claim is limited to an amount reflecting that proportion of the damage or loss claimed that the court considers just having regard to the extent of the defendant's responsibility for the damage or loss, and (b) the court may give judgment against the defendant for not more than that amount."

5  Mitchell Morgan Nominees Pty Ltd & Anor v Vella & Ors [2011] NSWCA 390

6  (2009) 25 VR 666; [2009] VSCA 245

All information on this site is of a general nature only and is not intended to be relied upon as, nor to be a substitute for, specific legal professional advice. No responsibility for the loss occasioned to any person acting on or refraining from action as a result of any material published can be accepted.

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