The High Court recently handed down their much anticipated decision in Selig v Wealthsure1, providing some well needed clarification on the proportionate liability provisions in the Corporations Act 2001 (Cth) (Act), in light of the inconsistent decisions of the Full Federal Court in Wealthsure2 and ABN AMRO v Bathurst City Council3

The majority decisions, handed down within a week of each other by a differently constituted bench of the Full Federal Court, took opposing views on the application of Division 2A of the Act.  The decision of the High Court in Wealthsure, while settling this inconsistency, is not good news for financial advisors or their ‘deep pocketed’ insurers, who may find themselves targets in lawsuits brought by disgruntled clients.  

The proportionate liability regime

Division 2 of Part 7.10 of the Act prohibits various types of misconduct in relation to the provisions of financial services or products.  One of the types of misconduct covered is misleading or deceptive conduct.  

Division 2A of Part 7.10 creates a regime of proportionate liability for several of the types of misconduct listed in Division 2, including misleading or deceptive conduct.  It provides that such claims are ‘apportionable claims’ where the damages being sought are for economic loss or damage to property.  These provisions are mirrored in the Australian Securities and Investments Commission Act 2001(Cth).  

The regime operates so that where a claim which falls within the scope of Division 2A (being an ‘apportionable claim’) is successfully brought against several defendants, the Court is to apportion the amount of damages awarded between the defendants, based on an amount the Court considers just, having regard to the extent of a defendant’s responsibility for the loss to the plaintiff.  

The purpose of the regime is to make each defendant liable only for an amount reflecting their responsibility in causing the loss.  This reverses the common law position where each defendant is jointly and severally liable to the plaintiff for the whole of the loss, shifting the risk of being unable to recover from a given defendant to the plaintiff.  It also prevents plaintiffs from simply chasing the defendant with the best insurance policy.  

Selig v Wealthsure

This case involved a claim by the Seligs for losses flowing from a failed investment scheme.  The Seligs had been advised by the first and second defendants, who were financial advisors, to invest $450,000 in a company called Neovest, which was in the business of the providing loans to property developers.  

It came to light after Neovest went into liquidation that the scheme was essentially a ‘Ponzi scheme’.  The Seligs brought an action for misleading or deceptive conduct, as well as for breach of contract, negligence and misrepresentation, all of which arose from the same conduct (being the investment advice given by the defendants).  

Justice Lander in the Federal Court found against the defendants on all grounds.  

On the question of whether the defendants were jointly or proportionately liable for the Selig’s loss, his Honour determined that the proportionate liability regime does not have the effect of bringing other claims (such as those brought under the common law), within the scope of the proportionate liability regime.  As such, the defendants were found to be jointly and severally liable for the award of damages.  

ABN AMRO v Bathurst City Council

In this case a group of local councils sought to recover money lost on a $16 million investment in structured financial products purchased from ABN AMRO on the advice of the councils’ financial adviser, Local Government Financial Services.  The council also brought the action against the rating agency Standard and Poors (S&P) who gave the products a AAA credit rating.  The councils alleged that S&P breached their duty of care by granting the rating solely based on information provided by ABN AMRO, without conducting their own inquiries.    

Justice Jagot found against all three defendants for misleading or deceptive conduct and negligence, as well as various other grounds.  In deciding whether the proportionate liability regime applied to the council’s claim, Justice Jagot took the opposite view to Justice Lander in Wealthsure and apportioned the liability between the three defendants equally.  

The Full Federal Court decisions

Both cases were appealed to the Full Federal Court.  

In Wealthsure the majority found that if one of the claims in respect of the same loss or damage was an ‘apportionable claim’, then the whole amount of the damages award would be apportionable, despite the fact that the damage could also be said to arise from other causes of action.  The focus of the majority was on the loss or damage suffered, as opposed to the nature of the conduct of the defendants.  

The Full Court in ABN AMRO, on the other hand, followed the approach taken by Justice Lander in the lower court decision inWealthsure, finding that because not all of the claims for which the plaintiff was successful were ‘apportionable claims’ under Division 2A, each defendant was jointly and severally liable for the loss to the plaintiff.    

These two competing decisions caused considerable uncertainty for defendants, as well as their insurers.  

The High Court’s approach

The decision in Wealthsure was appealed to the High Court.  The key issue before the Court was whether the proportionate liability regime applied to damages which arose from both claims falling under the proportionate liability regime and claims which did not.    

The majority in the High Court largely adopted the reasoning of Justice Lander in Wealthsure, focusing on the meaning of ‘apportionable claim’.  The majority had regard to the language and purpose of the whole provision and ultimately determined that if the word ‘claim’ was to have a consistent meaning across the whole of Division 2A, it could not be taken to refer to all claims, but only ‘apportionable claims’.  This reasoning is a good example of the application of the well established principles of statutory construction.  

The Court found that the purpose of the provision, in light of its context and the language used, was to apply a regime of proportionate liability to damages awards arising from claims falling within the relevant provisions.  To apply the regime where the damage also arose from claims falling outside Division 2A would not only result in an inconsistent meaning of the phrase ‘claim’ throughout the provision, but would render several other provisions largely irrelevant.  The correct approach in such circumstances is to adjust the meaning to achieve, as far as possible, a harmonious result.  

Although the reasoning of the High Court’s decision was largely uncontroversial, the decision is important as it settled an awkward contradiction in the case law.  However, the practical outcome for professional advisors and their insurers is unfortunate.    

The objective of the proportionate liability regime is to reallocate the risk among the parties and is largely aimed at preventing plaintiffs from simply chasing the defendant with the ‘deepest pockets’.  It also shifts the risk of being unable to recover from other defendants to the plaintiff.    

Given that in cases of misleading or deceptive conduct, plaintiffs commonly also plead the common law actions of negligence or misrepresentation in relation to the same conduct, then the High Court’s decision means that proportionate liability will no longer be applied in such cases, so long as a plaintiff is successful in establishing, for example, negligence as well as misleading or deceptive conduct.  This decision has the potential to return us to a time of ever-increasing insurance premiums, as it largely defeats the object of the statutory regime, and places professional advisors at risk of being individually liable for large damages awards, thanks to their generous professional indemnity policies.   

Such an outcome was clearly not the intention of the regime and will require future legislative intervention if this perverse outcome is to be rectified.