In brief - both parties held to be responsible for loss suffered by lender

Today the High Court of Australia allowed an appeal in the case of Hunt & Hunt Lawyers v. Mitchell Morgan Nominees Pty Ltd [2013] HCA 10 (3 April 2013), confirming and clarifying the operation of the proportionate liability regime in Australia.

Solicitors and fraudsters found to have caused "same loss" to lender

The majority has held that the fraudulent conduct of one party and the negligent drafting of a mortgage by another party, within the one mortgage transaction, were both causes of the loss suffered by the lender - being the inability to recover loan funds advanced.

The High Court has held that while the solicitors' negligent drafting of the mortgage was a cause of that loss, the lender would never have needed to take a mortgage had it not been induced by the fraudsters to enter into the transaction. Accordingly, both parties have been held to be concurrent wrongdoers and their loss has been apportioned by reference to their degree of responsibility under Part 4 of the Civil Liability Act 2002 (NSW) (CLA).

In short, the High Court has reinstated the apportionment of 12.5% liability for the solicitors on the basis that they are concurrent wrongdoers.

Loan obtained fraudulently and lender unable to recover loan advance

Mr Vella and his associate Mr Cardonna were involved in a joint venture to promote a boxing event and consequently opened a joint bank account for that purpose. Using this position, Mr Cardonnna with the assistance of Mr Flammia, his solicitor, fraudulently obtained a loan through Mitchell Morgan, secured by a property owned by Mr Vella.

The fraudsters represented that Mr Vella had appropriately signed the mortgage documents. The mortgage was subsequently registered on 19 January 2006 and Mitchell Morgan paid a sum of $1,001,748.85 into Mr Cardonna and Mr Vella's joint bank account.

Shortly thereafter, the funds were drawn down using forged cheques and the joint account closed. The loan funds were never repaid.

Mitchell Morgan was, unsurprisingly, unable recover the loan advance from the fraudsters. However, when it was also unable to hold on to the security property, by reason of a negligently drafted mortgage, it looked instead to its solicitors in the transaction, Hunt & Hunt, to recover.

Supreme Court finds that proportionate liability regime applies

At first instance, Young CJ in the Supreme Court of NSW held that:

  • Mr Vella was not liable to Mitchell Morgan as a borrower
  • Although forged, the mortgage attracted indefeasibility, but the wording was such that it secured nothing and it should thus be discharged
  • Hunt & Hunt was liable to Mitchell Morgan in negligence as a concurrent wrongdoer along with Mr Cardonna and Mr Flammia for the purposes of the application of the proportionate liability regime in Australia
  • The "just" apportionment of Hunt & Hunt's liability was 12.5%

NSW Court of Appeal increases liability of solicitors to 100%

The issue put to the Court of Appeal by Mitchell Morgan was whether Hunt & Hunt should have been liable for the "vast majority" of Mitchell Morgan's loss.

The Court of Appeal overturned the decision at first instance on the basis that Hunt & Hunt were not concurrent wrongdoers within meaning of the CLA since the economic loss caused by their omission was a separate loss to that caused by the actions of the fraudsters.

The Court agreed that the separate loss was suffered not because the money was lent, but because it could not be recovered from the security. Consequently, it held Hunt & Hunt's liability could not be apportioned and increased its liability to 100%.

Lawyers argue that proportionate liability regime should apply

On 12 December 2012 the High Court heard the appeal by Hunt & Hunt seeking clarification on the proper application of the proportionate liability regime.

While neither party disputed that the claim was an "apportionable claim", Hunt & Hunt submitted that the Court of Appeal's approach was one that prioritised form over substance, and thus failed to deliver a principled basis for distinguishing the two separate losses. They argued that the lender failed to recover the loan funds by reason of both the fraudulent loan agreement and the ineffective mortgage instrument - therefore the proportionate liability regime should apply.

Mitchell Morgan submitted that the Court needed to classify the "identity of damage or loss" between that caused by Mr Caradonna and Mr Flammia, and that caused by Hunt & Hunt. In essence, Mitchell Morgan argued that there were separate parts to the loan transaction and that Hunt & Hunt's failure to properly draft the mortgage was a different cause of loss to the loss caused by Mr Caradonna and Mr Flammia fraudulently inducing Mitchell Morgan to advance loan funds.

High Court confirms that all parties causing loss should be liable only to the extent of their responsibility

In a majority decision of French CJ, Hayne J, & Kiefel J, the High Court has confirmed the very purpose of the proportionate liability regime:

The evident purpose of Pt 4 is to give effect to a legislative policy that, in respect of certain claims such as those for economic loss or property damage, a defendant should be liable only to the extent of his or her responsibility. The court has the task of apportioning that responsibility...

It has been held that in identifying the damage or loss of the claim, it is necessary to distinguish the difference between "damages" awarded by the court (compensation) and damage suffered by a plaintiff (injury and other foreseeable consequences suffered).

The High Court has used the case of Kenny & Good Pty Ltd v MGICA (1992) Ltd (1999) 199 CLR 413 as an example of how to assess harm to a plaintiff's economic interests. The majority has stated that in that case, which involved a negligent valuation and a lender, the harm to the lender's economic interest as a consequence was the lender's inability to recover the amount owing under a mortgage:

The nature of Mitchell Morgan's economic interest is much the same. The harm suffered is that it is unable to recover the sums advanced.

In doing so, the High Court has confirmed that the proportionate liability regime and common law permit a wrongdoer's acts to be independent of those of another wrongdoer, yet cause the same damage.

Lender's loss due to both negligence of solicitors and fraudulent conduct of other parties

In essence the majority agreed with Hunt & Hunt's submissions that the lender suffered loss by reason of both the fraudulent conduct and the negligence of the solicitors. They have held that while the fraudsters started the doomed transaction and induced the lending, Hunt & Hunt failed to protect Mitchell Morgan's economic interests within that transaction:

In determining the question of causation, it is necessary to keep clearly in mind the harm suffered by Mitchell Morgan: its inability to recover monies advanced. Merely to then state the obvious facts - that the monies were advanced under the loan agreement and the security of the mortgage - is to acknowledge that the harm suffered has more than one cause.

Accordingly, the majority confirmed that both parties must be responsible for Mitchell Morgan's damage: "Mitchell Morgan should not recover from Hunt & Hunt any more than that for which Hunt & Hunt is responsible..."

The appeal was allowed, meaning the original 12.5% apportionment finding against Hunt & Hunt is reinstated.