Readers may recall our earlier article “Apportionment of loss following fraud on the lender” published in April 2013 (click here to read). This article related to the decision of the Court of Appeal in Perpetual Trustee Company Limited v CTC Group Pty Limited (No 2).
In the Court of Appeal, the Court found that CTC Group, the loan originator, who had failed to properly verify the identity of the mortgagor, was responsible for making good the lender’s entire loss. CTC Group sought unsuccessfully to rely on the Civil Liability Act 2002 (NSW) to apportion liability for the loss to the fraudster and others.
The Court held that the apportionment of liability regime established by the Civil Liability Act will not apply where the lender and originator have reached an agreement as to where the loss will lie. This includes an indemnity clause.
CTC Group filed an application seeking special leave to appeal against the Court of Appeal judgment.
The background facts and the special leave application are discussed below.
A case of Identity Fraud
Perpetual and CTC Group were party to a Loan Origination and Management Agreement.
Pursuant to the agreement, CTC Group was to identify, interview and introduce loan applicants to Perpetual.
CTC Group introduced David Bayeh, a loan applicant to Perpetual.
A loan was advanced to David Bayeh. Subsequently, default occurred under the loan and Perpetual commenced proceedings for possession and debt.
David Bayeh defended the proceedings on the basis that the signature purporting to be his on the loan agreement and mortgage was a forgery.
Perpetual joined the alleged fraudster, Youssef El Bayeh to the Proceedings.
Perpetual claimed that CTC Group had breached the terms of the Loan Origination and Management Agreement by failing to properly identify David Bayeh.
The trial judge found that Youssef El Bayeh had forged his brother, David’s signature on the loan documentation. However, Perpetual failed to obtain judgment against CTC Group because the trial judge found Perpetual had not established that CTC Group failed to properly identify David Bayeh.
Apportionment and Section 3A of the Civil Liability Act
The Civil Liability Act provides for proportionate liability for “apportionable claims”.
An “apportionable claim” includes a claim for economic loss or damage to property in an action for damages arising from a failure to take reasonable care.
Where a claim is apportionable the liability of one wrongdoer is limited to an amount reflecting that proportion of the damage or loss claimed that the Court considers fair having regard to the extent of that particular wrongdoers responsibility for the damage or loss.
However, there is an exception to the above. Section 3A(2) of the Civil Liability Act provides that the Act does not prevent the parties to a contract from making express provision for their rights, obligations and liabilities under the contract with respect to any matter to which the Act applies and does not limit or otherwise affect the operation of any such express provision.
The Court of Appeal relied on Section 3A in finding that:
- CTC Group and Perpetual had entered into an agreement whereby CTC Group had agreed to indemnify Perpetual for such losses; and
- the agreement fell within section 3A of the Civil Liability Act – which proposes that parties may in effect “contract out” of the Civil Liability Act.
In October 2013 the High Court refused CTC Group’s application for leave to appeal.
In refusing leave the High Court confirmed that in order to contract out of the operation of the Civil Liability Act there is no need to expressly refer to the Act - a standard indemnity clause is sufficient.
This represents the law in NSW. Other Australian States have different Civil Liability Act regimes which means contracting out may not be possible.