On 3 April 2013 the High Court delivered its much anticipated decision in the matter of Hunt & Hunt Lawyers v Mitchell Morgan Nominees Pty Ltd [2013] HCA 10.
By a majority of 3-2, the High Court overturned the New South Wales Court of Appeal decision and held that proportionate liability provisions of Part 4 of the Civil Liability Act 2002 (NSW) operated to substantially reduce the liability of a negligent solicitor for the loss suffered by a lender on a loan procured by fraud.
Background
Hunt & Hunt Lawyers (Hunt & Hunt) were the lawyers for Mitchell Morgan Nominees Pty Limited (Mitchell Morgan), a company engaged in the business of providing finance. Mitchell Morgan suffered loss as a result of a $1 million loan it provided to two individuals, Mr Cardonna and Mr Vella. It was revealed in the trial that Mr Caradonna had forged Mr Vella's signature on the loan documents and absconded with the funds. The funds were never recovered and Mr Caradonna became bankrupt.
As security for the obligations of Mr Vella, Mitchell Morgan had obtained a mortgage over one of Mr Vella's properties. The signature of Mr Vella on the mortgage document was also forged, but Mitchell Morgan's interest as mortgagee became indefeasible upon registration of the mortgage.
Hunt & Hunt prepared the mortgage document. As is common practice, the mortgage was expressed to secure all amounts owing by the mortgagor (Mr Vella) to the mortgagee (Mitchell Morgan). As a result of that wording, the mortgage despite its indefeasibility, was rendered unenforceable. As Mr Vella's signature on the loan agreement was forged, the Court found that Mr Vella owed nothing to Mitchell Morgan and the mortgage therefore secured nothing.
Mitchell Morgan joined Hunt & Hunt to the proceedings claiming that it was negligent in drafting the mortgage. Justice Young, the trial judge, agreed stating that the mortgage would have been enforceable if, rather than an all monies clause, the mortgage contained a covenant to repay a specified amount.
Although Hunt & Hunt were found to have been negligent, Justice Young also found that the fraudsters (being Mr Caradonna and his solicitor, Mr Flammia) were concurrent wrongdoers within the provisions in Part 4 of the Civil Liability Act and that the claim was apportionable. Justice Young found that Hunt & Hunt was only 12.5% responsible for the loss incurred by Mitchell Morgan, with the fraudsters bearing 87.5% of the responsibility. The amount payable by Hunt & Hunt was accordingly reduced to 12.5% of the total loss.
Mitchell Morgan appealed the decision.
The New South Wales Court of Appeal (which, in a rare step, was constituted by 5 judges) unanimously overturned Justice Young's judgment. Citing the decision of the Supreme Court of Victoria in St George Bank Ltd v Quinerts Pty Ltd (2009) 25 VR 666, the Court of Appeal held that the fraudsters and Hunt & Hunt were not concurrent wrongdoers as the damage they caused was different. The damage caused by the fraudsters was the failure to recover the loan amount whereas the damage caused by Hunt & Hunt was the taking of ineffective security. The liability of Hunt & Hunt was changed to 100% of the loss suffered by Mitchell Morgan.
Hunt & Hunt appealed the Court of Appeal decision to the High Court.
The High Court Decision
By a narrow majority, the High Court found there was no difference in the nature of the damage caused by the fraudsters and that caused by Hunt & Hunt and allowed the appeal. Mitchell Morgan was found to have suffered only one type of damage – a failure to recover the monies advanced. Both the fraudsters and Hunt & Hunt were responsible for that damage and the liability was therefore apportionable. The High Court reinstated Justice Young's decision and Hunt & Hunt's liability was reduced to 12.5% of the total loss suffered by Mitchell Morgan.
The decision has significant ramifications for lenders involved in professional negligence litigation, particularly claims against valuers. If a valuer can establish that there has been "wrongdoing" on the part of the borrower in the transaction, the liability of that valuer for providing a negligent valuation is likely to be substantially reduced.
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