Today, in Selig v Wealthsure Pty Ltd [2015] HCA 18, the High Court of Australia has unanimously allowed an appeal against the May 2014 decision of the Full Court of the Federal Court in Wealthsure Pty Ltd v Selig.[1]

The High Court has clarified that the proportionate liability regime in Div 2A of Part 7.10 of theCorporations Act 2001 (Cth) (“Corporations Act”) applies only to claims of misleading or deceptive conduct based on section 1041H and does not extend to other statutory claims (such as claims under section 1041E) based on the same underlying conduct and resulting in the same loss.

This decision resolves the conflict between the two decisions of differently constituted benches of the Full Court of the Federal Court in 2014 in Wealthsure and ABN Amro Bank NV v Bathurst Regional Council.[2]

The decision will assist plaintiffs in class actions and other litigation, and will have significant implications in Australian commercial litigation more generally, particularly litigation concerning securities and financial products and services.

Background

The scope of the Part 7.10, Div 2A proportionate liability regime was left unresolved following conflicting decisions of two differently constituted benches of the Full Court of the Federal Court in 2014. Each case involved contraventions of both 1041E of the Corporations Act (making false or misleading statements in relation to financial products) and section 1041H (misleading or deceptive conduct in relation to financial products or services). While claims for damages resulting from breaches of section 1041H are apportionable between defendants on the basis of the court’s view of each defendant’s responsibility for the plaintiff’s loss, no such regime expressly applies to breaches of sections 1041E, 1041F or 1041G. Specifically, section 1041E requires deliberate, negligent or reckless conduct, whereas section 1041H imposes liability without any requirement of “fault”.

On 30 May 2014, the Full Court of the Federal Court consisting of Mansfield, Besanko and White JJ handed down Wealthsure Pty Ltd v Selig. The matter involved a claim by investors against a financial adviser, the failed company in which they invested (Neovest), the directors of Neovest, and the principal of the financial services business which promoted investment in Neovest (Mr Norton). The majority concluded that, while damages arising from a contravention of section 1041E were not ordinarily apportionable, because the claim arose from the same facts as contraventions of section 1041H (which were apportionable), damages should be apportioned in respect of both of those sections. The Court ordered that the financial advisers pay 60% of the damages, Mr Norton pay 25%, and Mr Townley, one of the directors of Neovest, pay 15%.

Shortly after, on 6 June 2014, the Full Court of the Federal Court handed down its decision in ABN Amro Bank NV v Bathurst Regional Council.[3] The Court, consisting of Jacobson, Gilmour and Gordon JJ, held that, contrary to Wealthsure, damages for misleading statements under section 1041E are not apportionable, even if the claims arise from the same facts as contraventions of section 1041H concerned with misleading or deceptive conduct (which are apportionable). In doing so, the Court specifically stated that it preferred the view of the minority in the Wealthsure decision that section 1041L (the proportionate liability provision) applies only to causes of action which are expressly defined as apportionable claims.[4]

The conflict between these two authorities was recognised by Jacobson J in McGraw-Hill Financial Inc v City of Swan [2014] FCA 665.

Why is the scope of the Part 7, Div 2A proportionate liability regime so important?

The State and federal apportionment regimes were designed to moderate the extent of “deep pocket” defendants’ liability where others may also have been responsible for a plaintiff’s loss. Under the rules applicable to common law negligence and breach of contract claims, a defendant (such as an insured auditor or adviser) might find themselves liable for the whole of a plaintiff’s loss and with no effective means to claw any part of that liability back from other parties who contributed to that loss (such as the relevant company, its directors or other advisers).

Further, in the case of misleading or deceptive conduct claims, the defendant (who may not have been negligent and may have acted in good faith) could find themselves liable for the whole loss if their conduct was a non-trivial contributor to that loss and could not reduce their liability by pointing to the plaintiffs’ own carelessness. There was no contributory negligence defence.

The scope of the proportionate liability regime is critical because, in general, plaintiffs benefit where one defendant, potentially one with deep pockets, can be held liable for 100% of a plaintiff’s loss, whereas the ability to apportion liability across multiple defendants generally benefits those defendants (as the plaintiff bears the risk that any defendant is unable to pay).

Plaintiffs often base their claims on multiple causes of action (for example, combining claims for negligence or breach of contract with claims for statutory misleading or deceptive conduct under section 1041H) in an attempt to “cover all bases”. Often, these causes of action arise from the same conduct and relate to the same loss or damage. A claim founded on a breach of 1041H can also invoke Federal Court jurisdiction, which has certain procedural advantages, and may be easier to establish than other general law claims which involve some fault element.

In response to the so-called “insurance liability crisis”, and the perception that the civil liability regime for negligence and the statutory regime for misleading or deceptive conduct were both too plaintiff-friendly, changes were made to State and federal law to introduce proportionate liability defences in relation to common law negligence and statutory misleading or deceptive conduct claims and to also extend the contributory negligence defence to the latter claim category. As part of this reform, Part 7.10, Div 2A was introduced into the Corporations Act, making misleading or deceptive conduct claims under section 1041H subject to a proportionate liability regime under which each defendant may be apportioned liability according to the court’s assessment of the extent of their responsibility. A contributory negligence defence to such claims was also introduced.

Equivalent changes were made in other similar legislation.[5]

One key question remained, however: where a plaintiff brings multiple claims in respect of the same loss, alleging a breach of section 1041H (or some other apportionable statutory claim) in addition to one or more other claims (such as unconscionable conduct or breach of contract), and alleges that they caused the same loss, are all of those claims, or the loss sought to be recovered, apportionable by virtue of the new proportionate liability regime?

The High Court’s decision in Selig v Wealthsure

The High Court has held that, for a claim to be apportionable by virtue of Part 7.10, Div 2A, it must be an “apportionable claim” within the meaning given in Div 2A.[6]

What is an “apportionable claim”?

The High Court held that “apportionable claims” for the purposes of Div 2A are limited to those claims which are based upon a contravention of section 1041H, and that the term does not extend to claims based on other grounds even where the same loss, and indeed the same conduct, is alleged.[7]Accordingly, claims based on section 1041E or common law claims (or the loss associated with them), are not “apportionable claims” under section 1041L.

Contributory negligence for apportionable claims

The argument before the High Court appears to have proceeded on the basis that any restriction on the reach of the proportionate liability regime would apply to the contributory negligence defence and so it will not afford a defendant any protection in respect of loss recoverable under parallel claims (noting that common negligence claims are subject to the State-based contributory negligence defence).

Application to equivalent statutory provisions

By analogy, the High Court’s decision will also apply to equivalent apportionment regimes in other legislation, including the ASIC Act.

Consequences of the decision

As a result of this decision, it is likely that plaintiffs will continue the practice of pleading multiple claims, safe in the knowledge that while the statutory apportionment and contributory negligence defences are applicable to the easier to establish statutory misleading or deceptive conduct claims, those defences will not “infect” parallel statutory claims, even where the same loss is alleged. Accordingly, the apportionment and contributory negligence defences will be practically irrelevant unless the plaintiff succeeds only on their misleading or deceptive conduct or common law negligence claim.

Who does this affect?

Defendants in commercial litigation in Australia generally, and in particular, financial services providers and others with exposure to statutory liability for false or misleading statements in relation to financial services or products.