The High Court’s recent decision in Selig v Wealthsure Pty Ltd [2015] HCA 18 carries a warning for both financial service providers and their professional indemnity insurers.

Background

Mr and Mrs Selig (Seligs) suffered loss when their investment in Neovest Limited (Neovest) failed as a result of Neovest’s insolvency. The Seligs invested in Neovest in reliance on the advice of the second respondent, David Bertram (AR), who was an authorised representative of the first respondent, Wealthsure Pty Ltd (Wealthsure).

The Seligs claimed against the AR and Wealthsure for breach of contract, negligence and ss 1041E and 1041H of theCorporations Act 2001 (Cth) (Corporations Act) and various sections of the Australian Securities and Investments Commission Act 2001 (Cth) (ASIC Act). In their defence, the AR and Wealthsure argued that because the claim for breach of s 1041H was an ‘apportionable claim’ under the Corporations Act, Neovest and two of its directors, Mr Townley and Mr Norton (directors), were concurrent wrongdoers and liable for a portion of any loss for which the AR and Wealthsure were liable.

The decision at first instance

At trial the Seligs were successful in their claims against the AR, Wealthsure, the directors and Neovest and others for, relevantly, breaches of ss 1041E and 1041H of the Corporations Act. The AR and Wealthsure argued that because the claim for breach of s 1041H was an apportionable claim, they should only be liable for the loss and damage caused by their conduct. The court disagreed and ordered that the AR, Wealthsure and the directors were liable to the Seligs for damages in the order of $1,716,680. Liability was joint and several.

The AR and Wealthsure appealed.

The decision of the Full Court of the Federal Court

On appeal, the Full Court of the Federal Court found that the claims were apportionable, and that the AR and Wealthsure were only liable for 60% of the Seligs’ loss with the directors apportioned 40% of the liability. The court said that despite the fact that claims under s 1041E were not apportionable, because the Seligs’ claim arose from the same loss and damage as the claim under s 1041H, the claim was an apportionable claim.

The Seligs appealed to the High Court.

The decision of the High Court and its reasoning

The Seligs appealed the finding that their claim was an ‘apportionable claim’ pursuant to the Corporations Act and ASIC Act. In these Acts, proportionate liability may only be claimed in proceedings involving an ‘apportionable claim’, the definition of which is found in s 1041L Corporations Act (and the corresponding section of the ASIC Act).

Section 1041L is contained in Division 2A Proportionate Liability for Misleading and Deceptive Conduct and provides that:

‘1. This division applies to a claim (an apportionable claim) if the claim is a claim for damages made under section 1041I for:

(a) economic loss; or

(b) damage to property;

caused by conduct that was done in contravention of section 1041H.

2. For the purposes of this Division, there is a single apportionable claim in proceedings in respect of the same loss or damage even if the claim for the loss or damage is based on more than one cause of action (whether or not of the same or a different kind).’ (emphasis added)

Section 1041I relevantly permits an action to be brought with respect to conduct which contravenes ss 1041E (false and misleading statements), 1041F (inducing persons to deal), 1041G (dishonest conduct) or 1041H (misleading or deceptive conduct).

The High Court held that the word ‘claim’ had the same meaning in both sub-sections 1041L (1) and (2), and refers to a claim for damages under s 1041I for damage caused by conduct in contravention of s 1041H.

Importantly, the High Court held that the true purpose of s 1041L(2) was not to complete the definition of ‘apportionable claim’, but rather to provide that damages based upon a contravention of s 1041H are to be apportioned by reference to a notional single claim so long as the loss or damage claimed is the same.

The High Court noted that contraventions of the other three provisions in s 1041I involve a higher level of moral culpability than the conduct referred to in s 1041H. Further, and in contrast to s 1041H, ss 1041E to 1041G constitute offences, an element of which is knowledge or recklessness.

The High Court concluded that an ‘apportionable claim’ based upon a contravention of s 1041H does not extend to claims based upon conduct of a different kind even if a claim includes a breach of s 1041H and another section (such as the contravention of s 1041E).

The High Court therefore ordered that the AR, Wealthsure and the directors were liable to the Seligs for damages in the order of $1,760,512. This liability was joint and several, potentially exposing Wealthsure and the AR (and in effect, their insurer) to 100% of the judgment amount should the Seligs seek to enforce the order against them alone.

Costs order against the Insurer

The Seligs sought an order that the AR’s professional indemnity insurer (insurer) pay the Seligs’ costs of the appeals in both the High Court and the Federal Court despite the insurer not being a party to the litigation.

The High Court has a discretionary power to make cost orders against non-parties where ‘the interests of justice require that to be made’.1

The insurance policy in question provided cover to a limit of $3 million per claim (inclusive of costs and expenses). The AR had been declared bankrupt prior to the Federal Court appeal, and Wealthsure’s ability to meet an adverse costs award was uncertain.

By the time the matter was appealed to the High Court the limit had already been significantly eroded by the legal costs of the AR and Wealthsure’s appeal to the Full Federal Court, which was said to be around $1.35 million. In reaching its decision on costs, the High Court noted that the insurer’s decision to appeal to the Full Federal Court:

  1. Put the Seligs to further significant legal expense; and
  2. Had the effect of reducing the amount available to the AR and Wealthsure to meet the order for costs (and any orders on future appeals) in favour of the Seligs as it eroded the $3 million of cover.

The High Court found that in the circumstances it was appropriate for the insurer itself to pay the Seligs’ costs for both appeals.

Significance

This decision makes it clear that the apportionment of liability provisions of the Corporations Act and the ASIC Act only apply to contraventions of s 1041H and the ASIC Act equivalent, potentially exposing deep pocketed defendants and their insurers to the entirety of adverse judgments.

The costs ordered against the non-party insurer also provides a warning to insurers who wish to assume conduct of trials and appeals on behalf of their insureds, where the indemnity limit is being significantly eroded by costs.