The High Court and the NSW Court of Appeal have recently provided much needed clarification about the proportionate liability regime in the NSW Civil Liability Act, 2002.

Although the proportionate liability regime has been around since 2004, there has been relatively little judicial guidance as to its practical application. Happily some assistance has now been provided by the High Court in its 3 April 2012 decision in Hunt & Hunt Lawyers v Mitchell Morgan Nominees Pty Ltd and by the NSW Court of Appeal in Perpetual Trustee Company Ltd v CTC Group Pty Ltd, a decision handed down on 20 March this year.

High Court decision

The High Court case involved a forgery of a mortgage which secured the debt owed to Mitchell Morgan by Messrs Caradonna (the forger) and Vella. The mortgage and loan documentation had been prepared by Hunt & Hunt, the solicitors for Mitchell Morgan. Caradonna withdrew the loan money by forging Vella’s signature and used the money for his own purposes. His fraud had been assisted by his cousin, Mr Flammia, a solicitor who dishonestly certified the witnessing of Vella’s signature on the loan and mortgage documentation. Both Caradonna and Flammia were bankrupt by the time proceedings were first commenced in the NSW Supreme Court.

The Judge at first instance found the loan agreement was void due to the forgery. The mortgage had gained the benefit of indefeasibility of title but because it purported to secure indebtedness by reference to the void loan agreement, it was liable to be discharged. Hunt & Hunt was found negligent because it should have prepared a mortgage containing a covenant to repay a stated sum.

Hunt & Hunt claimed that it was relevantly a “concurrent wrongdoer” in relation to the claim, that is, that it was one of two or more persons whose acts or omissions caused, independently of each other or jointly, the damage or loss that was the subject of the claim, Caradonna and Flammia being the other persons. The trial judge agreed and apportioned 12.5 percent liability to Hunt & Hunt.

The Court of Appeal overturned that decision, finding that Hunt & Hunt was not a concurrent wrongdoer and were 100% responsible for the losses suffered because the acts of Caradonna and Flammia had not caused the “loss or damage” which was claimed by Mitchell Morgan against Hunt & Hunt.

The issue for the High Court was the correct identification of the “loss or damage”. In the Court of Appeal, consistent with a Victorian Court of Appeal decision of St George Bank Ltd v Quinerts Pty Ltd, the Court found that the economic loss caused to Mitchell Morgan by Caradonna and Flammia was “paying out money when it would not otherwise have done so” whereas the economic loss caused by Hunt & Hunt was “not having the benefit of security for the money paid out”.

The majority of the High Court considered that Mitchell Morgan’s loss or damage was not identified by those two statements but rather those statements only identified the immediate effects of the fraudulent and negligent conduct. The majority noted that “[i]t is undeniable that these effects are important in establishing how the loss or damage ultimately came to be suffered and therefore to the issue of causation. However, they cannot be equated with that loss and damage”.

The loss or damage of Mitchell Morgan was found to be its inability to recover the monies it advanced and the majority agreed with Hunt & Hunt’s submission that there were two conditions necessary for the mortgage to be completely ineffective:

  1. the loan agreement was void, and
  2. the mortgage document did not contain the debt covenant.

While Hunt & Hunt was responsible for the latter, Caradonna and Flammia were responsible for the former and thus the acts or omissions of all of them contributed to the inability to recover the loan monies. Accordingly, Hunt & Hunt was a concurrent wrongdoer and the original decision to apportion it 12.5 percent of the liability was restored.

NSW Court of Appeal decision

The NSW Court of Appeal decision addressed whether the proportionate liability regime applies where there are contractual indemnities. The circumstances also arose from a fraud in relation to a mortgage. In a separate decision, CTC had been found liable to Perpetual for breaching its obligations of care under a mortgage origination deed. CTC argued that there were others who were concurrent wrongdoers, including a Mr Youssef El-Bayeh who fraudulently procured the loan from Perpetual, two Justices of the Peace who witnessed the forged loan and mortgage documents and the manager of the loan for Perpetual.

The mortgage origination deed contained the following indemnity:

“The Originator [CTC] indemnifies the Trustee [Perpetual] and the Manager against any liability or loss arising from and any costs, charges and expenses in connection with:

...

(d) any breach by the Originator of any of its warranties or obligations under or arising from this deed or failure to perform any obligation under this deed, including, without limitation, liability, loss, costs, charges or expenses on account of funds borrowed, contracted for or used to fund any amount payable or expense incurred under this deed and including in each case, without limitation, legal costs and expenses on a full indemnity basis or solicitor and own client basis, whichever is the higher.”

CTC had warranted that it would exercise reasonable care to identify proposed borrowers and to ensure that those persons had authorised the making of applications submitted by CTC to the manager.

The Court rejected CTC’s submission that the proportionate liability regime applied, noting that the indemnity clause “makes express provision for the rights and liabilities of Perpetual and CTC respectively under the contract that is inconsistent with the application of the appointment provision in Part 4 of the Civil Liability Act”.

The Court found that the indemnity clause “made express provision for their rights, obligations and liabilities under the contract with respect to any matter” to which the Act applies, within the meaning of section 3A(2) of the Act and accordingly, the Act did not limit or otherwise affect the indemnity clause.

In so finding, the Court noted that no express reference needs to be made to the Act for the clause to have that effect.

It is important to note not all of the proportionate liability legislation around the country has similar provisions as section 3A(2). In Queensland, parties are unable to contract out of the regime, whereas the legislation in Victoria, South Australia, the Australian Capital Territory and the Northern Territory and the Australian Consumer Law provisions relating to proportionate liability are silent about the matter.

Although unnecessary for the decision, the members of the Court of Appeal did express some views on whether the claim arose from a failure to take reasonable care, a necessary precondition for the application of the proportionate liability regime. Perpetual argued that while its claim was partially based on CTC’s failure to take reasonable care, there were other bases of claims which were not so founded (its claim for indemnity, in particular). Justice Macfarlan expressed the view that it was necessary for the absence of reasonable care to be an element of the, or a, cause of action upon which the plaintiff succeeded for the damages to have arisen from “a failure to take reasonable care”. His Honour stated “If claims could be apportioned where negligence is not an element of the successful cause of action, but merely arises from the facts, a plaintiff could lose his or her contractual right to full damages from a party whose breach of a contractual provision of strict liability happened to stem from a failure to take reasonable care”. His Honour’s view appears inconsistent with that of Justice Barrett in Reinhold v New South Wales Lotteries Corporation, the latter being a view that has received academic criticism. Justice Barrett was a member of the Court in the Perpetual case and has maintained his position, stating that the nature or quality of a claim is assessed by “a combination of the terms in which the claim is framed (or pleaded) and relevant findings of the Court in relation to it”.

The two decisions provide some clarification on this complicated area.

The Court of Appeal’s decision is a welcome one to parties which go to the trouble of allocating risk in their contractual relationships.

The High Court’s decision emphasises the need to identify the loss or damage suffered, rather than focussing upon the cause of the loss or damage or the effect of the contravening conduct. The harm which results from the contravening conduct is the loss or damage suffered. It results in a sensible outcome in situations where fraudsters are involved, as it would seem to be contrary to the intention of the regime to lump a negligent party with the total responsibility for the loss caused when a fraudster dupes everyone involved.