Background

The High Court of Australia recently delivered its judgment in Selig v Wealthsure Pty Ltd[2015] HCA 18 in which the court made a costs order against a professional indemnity insurer, a non-party to the proceedings.  In making the decision in Selig, the court referred to its previous decision in Knight FP Special Assets Ltd (1992) 174 CLR 178, the leading authority regarding non-party costs orders.  The decision in Knight confirmed the courts’ powers to make costs orders against non-parties and identified that such orders may be made if the case falls within a “general category of case where a non-party costs order might be appropriately made” and the interests of justice require that such order is made.  In particular, a case will fall within that “general category” if the following three criteria are satisfied

  • the party to the litigation is an insolvent person or man of straw;
  • the non-party has played an active part in the conduct of the litigation; and
  • the non-party has an interest in the subject of the litigation. 1

In the Selig case, the plaintiffs brought proceedings in the Federal Court against their financial adviser and his employer company (Wealthsure), as well as the company the plaintiffs invested in and its directors.  The financial adviser had recommended the investments which turned out to be a “Ponzi scheme”.  The plaintiffs’ claim was based upon contraventions of a number of provisions of the Corporations Act 2001 (Cth) and theAustralian Securities and Investments Commission Act 2001 (Cth), including s 1041H of the Corporations Act which prohibits misleading and deceptive conduct in relation to a financial product or service.  The plaintiffs also alleged that the financial adviser and Wealthsure breached their contractual and tortious duties of care owed to them as providers of financial advice. 

As part of their defence, the financial adviser and Wealthsure submitted that, based on the proportionate liability provisions in Div 2A of Pt 7.10 of the Corporations Act and the corresponding provisions in the ASIC Act, their liability should be limited to a proportion of the plaintiffs’ loss and damage for which they were responsible.  The Corporations Act relevantly provides in s 1041L that Div 2A applies to a claim for loss or damage “caused by conduct that was done in a contravention of s 1041H” (an apportionable claim).

The plaintiffs succeeded at trial.  The trial judge did not accept the defendants’ argument regarding the applicability of Div 2A and entered judgment for the plaintiffs on the basis that each defendant was liable for the whole of the damage suffered by the plaintiffs.  The trial judge held that Div 2A applied only where there had been a contravention of s 1041H and had no application where a plaintiff succeeded on other statutory and common law causes of action.

The defendants successfully appealed the trial judge’s findings in relation to the applicability of Div 2A in the Full Federal Court.  The plaintiffs then appealed to the High Court.  As part of their appeal, the plaintiffs sought an order that Wealthsure’s professional indemnity insurer pay their costs of that appeal and of the appeal in the Federal Court.

Apportionable Claim

The High Court unanimously allowed the appeal and held that the proportionate liability regime in Div 2A applies only to claims of misleading or deceptive conduct based upon a contravention of s 1041H and does not apply to other statutory or common law causes of action.  The court held that an “apportionable claim” for the purposes of Div 2A is, relevantly, a claim based upon a contravention of s 1041H and that this term does not extend to claims based upon conduct of a different kind.  In court’s view, this reasoning applies equally to the analogous provisions in the ASIC Act. 

Costs against Non-party

The High Court further held, with reference to the criteria in Knight described above, that the circumstances of the case justified an award of costs against the professional indemnity insurer.  The court observed that it was the insurer who had the conduct of the defence at trial and made the decision to appeal from the judgment of the trial judge to the Full Federal Court.  Shortly after the defendants brought the appeal, the financial adviser was declared bankrupt, and it was common ground that Wealthsure was also unable to meet the judgment sum and costs.  The court held that by bringing the appeal against the decision of the trial judge, the insurer was acting for itself in seeking to better its position.  As Wealthsure’s cover under the policy was capped, the insurer’s decision to appeal meant that monies which it would otherwise have been obliged to pay to the plaintiffs would be diverted to meet the insurer’s legal costs.  The court held that in those circumstances the insurer should not be regarded as immune from the risk of an order for costs.   

The court acknowledged that, given that the insurer’s appeal to the Full Federal Court was successful, the insurer’s actions in bringing the appeal could not be considered as entirely unreasonable.  However, with reference to a previous authority, the court observed that the power to make a non-party costs order against an insurer was not limited to the circumstances where the insurer had acted unreasonably in causing the insured to defend the claim.

Comment

Although it is possible that in deciding to award costs against the insurer the High Court was influenced by particular circumstances of the case, such as the terms of the policy capping Wealthsure’s cover and the insureds’ inability to pay the plaintiffs’ costs, insurers should keep in mind that they are not immune from non-party costs orders.  Insurers need to be alert to the implications of making decisions that may impact the cover available to insureds or claimants