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Australia – Proportionate Liability: High Court Broadens Scope Of “Same Damage” Test.

3 May, 2013

 

In 2002, all Australian States and the Commonwealth enacted legislation which, in certain types of cases, has replaced joint and several liability with proportionate liability. In NSW, the provisions are contained in Part 4 of the Civil Liability Act 2002 (NSW). In simple terms, proportionate liability is a statutory defence available to a wrongdoer when others are also partly responsible for a plaintiff's loss or damage. As a defence, the defendant bears the onus of both pleading and proving proportionate liability.

 

The legislation addressed the problem at common law that plaintiffs could sue "deep pocketed" defendants who, even if they were only marginally liable, would be required to underwrite the whole of a plaintiff's loss. The provisions have the effect of passing the risk of a defendant being insolvent or untraceable to plaintiffs in relation to certain types of claims for economic loss.

 

Under section 34 of the Civil Liability Act 2002 (NSW) two key elements must be satisfied in order for proportionate liability to apply. Firstly, the claim must be an "apportionable claim", which includes claims for economic loss or damage to property in an action for damages (whether in contract, tort or otherwise) arising from a failure to take reasonable care, or for misleading or deceptive conduct. Secondly, the defendant must be a "concurrent wrongdoer". Under section 34(2) a concurrent wrongdoer "is a person who is one of two or more persons whose acts or omissions (or act or omission) caused, independently of each other, the damage or loss that is the subject of the claim."

 

Recent judgments, including the Victorian Court of Appeal in St George Bank v Quinerts and the NSW Court of Appeal in Mitchell Morgan Nominees Pty Ltd & Anor v Vella & Ors have adopted a narrow construction of the words "the damage or loss that is the subject of the claim" in section 34(2) and equivalent provisions, finding that it has the same meaning as "the same damage" in section 23B of the Wrongs Act 1958 (Vic) (which allows parties, in certain circumstances, to seek contribution from other parties for the "same damage").

 

In Hunt & Hunt Lawyers v Mitchell Morgan Nominees handed down on 3 April 2013, the High Court by a 3:2 majority has moved away from this narrow approach providing greater scope to defendants to benefit from the proportionate liability regime.

 

Facts

 

The case concerned a negligence claim by Mitchell Morgan Nominees Pty Ltd (the Lender) against Hunt & Hunt (the Lawyers).

 

In late 2005 Mr Caradonna and Mr Flammia (the Fraudsters) obtained a loan from the Lender by way of forged loan documents. The Lawyers acted for the Lender in relation to the mortgage documentation.

 

In preparing the mortgage documentation the Lawyers negligently used a form of mortgage which secured the property by reference to the loan agreement rather than by a covenant to pay a stated amount. As the loan agreement was void due to the forgery, the mortgage secured nothing and was liable to be discharged.

 

The first instance decision Young CJ found that the Fraudsters were "concurrent wrongdoers" under s 34 of the Civil Liability Act 2002 (NSW) and therefore it was necessary to apportion the Lender's loss between them and the Lawyers. His Honour determined that the damages payable to the Lender should be apportioned as follows:

 

  • 72.5% to Mr Caradonna, who orchestrated the fraud and was the most morally blameworthy;
  • 15% to Mr Flammia; and
  • 12.5% to Hunt & Hunt.

 

The Court of Appeal decision

 

The Court of Appeal overturned the first instance decision on the grounds that the Fraudsters' acts did not cause the loss or damage which the Lender claimed against the Lawyers.

 

The Court of Appeal characterised the Lender's damage occasioned by the Fraudsters' conduct as advancing loan funds when it would not otherwise have done so, whereas the damage occasioned by the Lawyers' negligence was that the Lender did not have the benefit of security over the property for the money paid out.5 Accordingly, the Lawyers and the Fraudsters were not liable with respect to the "same damage" and therefore not "concurrent wrongdoers". The enabled the Lender to recover 100% of its loss against the Lawyers.

 

The Court of Appeal noted that there is a "wellrecognised distinction" between "damage" and "damages", "damage" being the personal, proprietary or economic interest that is harmed and "damages" being the monetary sum that is awarded in respect of that harm. Even if the damages payable by both tortfeasors are in the same amount, it does not follow that they are liable in respect of the same "damage".

 

The majority decision in the High Court

 

Characterisation of damage

 

While the majority of the High Court (French CJ, Hayne and Kiefel JJ), accepted the distinction between "damage" and "damages", the principal issue to be determined was the proper identification of the loss or damage suffered by the Lender.

 

The majority held that the Lender's damage was its inability to recover the monies it advanced. Although the Lender's claim against the Lawyers was based on a

different cause of action to the claims it would have had against the Fraudsters, both the Lawyers and the Fraudsters materially contributed to the Lender's inability to recover those monies.

 

The majority considered that the Court of Appeal's analysis had focused on the immediate effects of the Fraudsters' conduct (paying out money) and the negligence of the Lawyers (not having the benefit of security) without identifying the actual harm to the Lender's economic interest (the inability to recover the funds lent).

 

The majority highlighted that if the Court of Appeal's characterisation was adopted the Lender would have suffered no financial loss at the time the "damage" was sustained. Rather, there was a serious risk that loss would accrue. The majority noted "In general terms, in a case involving a loan of monies, damage will be sustained and the cause of action will accrue only when recovery can be said, with some certainty, to be impossible".

 

Causation

 

The majority considered that there could be no doubt, based on the findings of the primary judge, that the Lawyers were a wrongdoer whose actions were a cause of the Lender's inability to recover the monies advanced. The question under section 34(2) is whether the Fraudsters' acts, independently of the Lawyers, also caused that damage. The majority accepted the Lawyers' submission that there were in fact two conditions necessary for the mortgage to be ineffective – the loan agreement was void and the mortgage itself did not contain a debt covenant. The Fraudsters were responsible for the first condition and the Lawyers for the second. The Fraudsters' conduct was therefore a factor that contributed to the Lender's inability to recover.

 

The majority observed that in St George Bank Ltd v Quinerts Pty Ltd, there was a suggestion that "there is some requirement that one wrongdoer contribute to the wrongful actions of the other wrongdoer in order that they cause the same damage"7. The majority noted that this is not a requirement under Part 4 of the Civil Liability Act 2002 (NSW) – the question is whether each wrongdoer materially contributed to the loss or damage suffered.

 

Outcome

 

The majority held that while the Lawyers' negligence was a cause of the Lender's loss, it was not consistent with the policy of Part 4 that the Lawyers be wholly responsible for the damage when regard is had to the role played by the Fraudsters. Accordingly the Lender should not recover from the Lawyers any more than the loss for which they were responsible, as found by the primary judge (12.5%).

 

Minority Judgment

 

The minority (Bell and Gageler JJ) upheld the approach of the Court of Appeal, characterising the loss caused by the Lawyers as the lack of a security for the loan. They held that nothing done by the Fraudsters caused this particular loss, and the fact that the loan transaction would not have occurred at all but for the actions of the Fraudsters was "not to the point". Accordingly, they considered the Fraudsters and the Lawyers could not be "concurrent wrongdoers".

 

The High Court's 3:2 split in this case illustrates the complexities involved in determining whether defendants are "concurrent wrongdoers". Whilst the majority's judgment supports a broader construction of the proportionate liability provisions than has previously been adopted by intermediate appellate courts in Australia, it will remain important for parties to carefully analyse claims against wrongdoers to ascertain whether, on the facts of the case, each of them did in fact materially contribute to "the loss or damage suffered" by the plaintiff.

 

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For further information, please contact:

 

Angela Pearsall, Partner, Ashurst
angela.pearsall@ashurst.com

 

Kate Boomer, Ashurst
kate.boomer@ashurst.com

 

Anthony Ursino, Ashurst
anthony.ursino@ashurst.com

 

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