Australia: High Court ruling confirms wide reach of proportionate liability

Hunt & Hunt Lawyers v Mitchell Morgan Nominees Pty Ltd [2013] HCA 10

On 3 April 2013, the High Court handed down its first decision on the proportionate liability regimes enacted throughout Australia in the early 2000s. The case considered whether the liability of a firm of solicitors could be proportionately reduced to reflect the culpability of two fraudsters.

At issue was whether the fraudsters caused the damage or loss that was the subject of the claim against the solicitors. Whilst the outcome was specific to the facts of the case, the court's reasoning confirms that proportionate liability will apply to the advantage of defendants in a wide range of circumstances.

Brief facts

In 2005, Alessio Vella and Angelo Caradonna agreed to join in a venture to sell tickets for the upcoming non-title WBA super middle weight bout between Anthony Mundine and Danny Green. They opened a joint bank account and Vella provided certificates of title for three properties he owned. Unbeknownst to Vella, Caradonna used the certificates of title to procure fraudulent loans. He was assisted in this by his cousin, a solicitor Lorenzo Flammia, who falsely witnessed documents identifying Caradonna as Vella as well as loan agreements and mortgages forged by Caradonna.

One of the fraudulent loans was for $1,001,784.85 by Mitchell Morgan Nominees Pty Ltd. Mitchell Morgan's solicitors were Hunt & Hunt who prepared the relevant mortgage. The mortgage was expressed to secure the indebtedness of Vella under the loan agreement. The mortgage became indefeasible upon registration at the Titles Office but because the loan agreement was forged, and therefore a nullity, the mortgage secured nothing and was liable to be discharged.

Decisions of the trial judge and Court of Appeal

Hunt & Hunt admitted a breach of retainer and duty to exercise reasonable care, skill and diligence because the mortgage should have been expressed to secure an amount stated within the mortgage rather than to refer to the loan agreement. Had it been drafted that way, the mortgage would have been effective to secure Mitchell Morgan's loan and Vella may have had a claim against the Torrens Assurance Fund.

Hunt & Hunt maintained, however, that its liability should be proportionately reduced to reflect the superior culpability of the fraudsters, as concurrent wrongdoers under the proportionate liability provisions of the Civil Liability Act 2002 (NSW). At first instance, Young CJ in the Equity Division of the New South Wales Supreme Court, agreed and apportioned liability 72.5% to Caradonna, 15% to Flammia and 12.5% to Hunt & Hunt. By this time, the fraudsters, Caradonna and Flammia, were bankrupt.

A specially convened five justice New South Wales Court of Appeal disagreed and found that the proportionate liability provisions did not apply because the fraudsters were not concurrent wrongdoers whose "acts or omissions (or act or omission) caused, independently of each other or jointly, the damage or loss that is the subject of the claim." ¹ This was because the damage that was the subject of the claim against Hunt & Hunt was the defective mortgage security, whereas the damage caused by the fraudsters was the payment of the money.

High Court's decision

By a 3:2 majority consisting of French CJ, Hayne and Kiefel JJ, the High Court disagreed with the New South Wales Court of Appeal and found that the damage or loss to Mitchell Morgan (in the sense of the harm to its economic interests) caused by Hunt & Hunt was Mitchell Morgan's inability to recover the monies it advanced.

The fraudsters also caused this damage by inducing Mitchell Morgan to lend in reliance on the forged instruments. The defective mortgage was a step in causation of the damage but not the ultimate damage or loss to which the definition of "concurrent wrongdoer" and the process of apportionment requires attention.

Significantly, the majority disagreed with the reasoning (although not necessarily the decision) of the Victorian Court of Appeal in St George Bank Ltd v Quinerts Pty Ltd (2009) 25 VR 666. In that case, a valuation firm which negligently over-valued the bank's security sought to maintain that its liability should be reduced to reflect the culpability of the borrower and guarantor who failed to repay the bank's loan the subject of the security.

The Victorian Court of Appeal found that the damage for which the valuer was liable was the inadequacy of the bank's security and that this was not same damage caused by the borrower and guarantor's failure to repay the loan. In reaching this view, Nettle JA drew an analogy with a scenario where moneys stolen from a bank were uninsured by reason of the negligence of an insurance broker.

According to the Victorian Court of Appeal, the loss caused by the thief and the insurance broker were different – the thief caused the loss of the bank's money and the insurance broker caused the bank's inability to claim indemnity for that loss. However, the High Court majority in Hunt & Hunt disagreed, observing:

In that analogy, it is correct to describe the damage or loss suffered by the bank as its inability to recover the monies stolen. One source of recovery could have been its insurer, hence the brokers were a cause of its loss. The other possible source of recovery is the thief. The harm to the bank's economic interests, at a certain point, is the inability to recover from either source.²

Implications

Very often, the central role of solicitors, valuers, insurance brokers, accountants and other professionals is to protect clients against adverse contingencies, including the harm that others may do to them: a misleading counter-party in a transaction, a negligent director or officer managing the client's business or a rogue employee undetected by an auditor, among many examples. The High Court's decision confirms that proportionate liability will apply, to reduce the professionals' exposure, in many of these cases.

A key issue for the courts remains how to balance a professional's failure to discharge their protective duties (and the portion of liability that should attach to this) against the culpable conduct of concurrent wrongdoers. This requires consideration of the defendants and concurrent wrongdoers' conduct as a whole, the degree of departure from the standard of care expected of each of them and the causal potency of those departures.

The High Court was not required to reassess the trial judge's apportionment of liability between Hunt & Hunt and the fraudsters. In the years since that May 2008 decision, some courts have placed less emphasis on moral blameworthiness and more weight on the failure of a professional to discharge a protective duty.³

Professional defendants and their insurers should continue to watch the trends in the case law and weigh carefully the range of factors relevant to apportioning liability when assessing their exposures.

Footnotes

¹s 34(2) Civil Liability Act 2002 (NSW). Materially similar definitions of "concurrent wrongdoers" apply in each of the other States and Territories and in Commonwealth legislation except for Queensland where concurrent wrongdoers are those who independently but not jointly cause the loss or damage that is the subject of the claim.

²Hunt & Hunt Lawyers v Mitchell Morgan Nominees Pty Ltd [2013] HCA 10 [40].

³For example, Solak v Bank of Western Australia Ltd [2009] VSC 82 and Spiteri v Roccisano (2009) 22 VR 596.

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