Introduction
High Court decision
New South Wales Court of Appeal decision
Comment


Introduction

The High Court and the New South Wales Court of Appeal have recently provided much-needed clarification about the proportionate liability regime detailed in the New South Wales Civil Liability Act 2002. Although the regime has been in place since 2004, there had previously been relatively little judicial guidance as to its practical application. Assistance on this matter has now been provided by:

  • the High Court's April 3 2012 ruling in Hunt & Hunt Lawyers v Mitchell Morgan Nominees Pty Ltd; and
  • the New South Wales Court of Appeal's March 20 2013 ruling in Perpetual Trustee Company Ltd v CTC Group Pty Ltd.

High Court decision

Facts
The case involved the forgery of a mortgage which secured the debt owed to Mitchell Morgan by Mr Caradonna (the forger) and Mr 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 was 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 New South Wales Supreme Court.

First instance decision
The judge at first instance found that 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% liability to Hunt & Hunt.

Appellate decision
The New South Wales Court of Appeal overturned the first instance decision, finding that Hunt & Hunt was not a concurrent wrongdoer and was 100% responsible for the losses suffered, as the acts of Caradonna and Flammia had not caused the 'loss or damage' claimed by Mitchell Morgan against Hunt & Hunt.

High Court decision
The issue for the High Court was the correct identification of such loss or damage. In the court of appeal - consistent with a Victorian Court of Appeal decision in 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".

A majority of the High Court considered that Mitchell Morgan's loss or damage was not identified by those two statements, but rather that the statements identified only 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 to Mitchell Morgan was found to be its inability to recover the moneys that it had advanced. Furthermore, the majority agreed with Hunt & Hunt's submission that there were two conditions necessary for the mortgage to be completely ineffective:

  • The loan agreement was void; and
  • 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; thus, the acts or omissions of all three contributed to the inability to recover the loan moneys. Accordingly, Hunt & Hunt was a concurrent wrongdoer and the original decision to apportion it 12.5% of the liability was restored.

New South Wales Court of Appeal decision

This 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:

  • 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 need be made to the act for the clause to have that effect.

Not all of the proportionate liability legislation around the country has similar provisions to 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 consumer law provisions relating to proportionate liability are all silent on the matter.

Although unnecessary for the decision, the members of the appellate court expressed their 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 that 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 on which the plaintiff succeeded for the damages to have arisen from "a failure to take reasonable care". The judge stated that:

"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 view appears inconsistent with that of Justice Barrett in Reinhold v New South Wales Lotteries Corporation, a view that has received academic criticism. Barrett was a member of the court in Perpetual 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".

Comment

The two decisions provide some clarification on this complicated area. The New South Wales Court of Appeal's decision is welcome to parties that 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 focusing on 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. This results in a sensible outcome in situations where fraudsters are involved, as it would appear contrary to the intention of the regime to burden a negligent party with the total responsibility for the loss caused when a fraudster dupes everyone involved.

For further information on this topic please contact Anne Freeman at Piper Alderman by telephone (+61 2 9253 9999), fax (+61 2 9253 9900) or email (afreeman@piperalderman.com.au).

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