Valuers and solicitors involved in mortgage or other loan transactions will be concerned to hear that one of the favourable proportionate liability cases in New South Wales has recently been overturned.
Allessio Vella and Angelo Caradonna were involved in a joint venture. As a result of this relationship, Mr Caradonna fraudulently obtained possession of certificates of title to properties owned by Mr Vella. Unbeknownst to Mr Vella yet with the assistance of Mr Caradonna's solicitor, Lorenzo Flammia, Mr Caradonna applied for mortgage finance in Mr Vella's name to, amongst others, Mitchell Morgan Nominees Pty Limited (Mitchell Morgan).
Mr Flammia made misrepresentations to Mitchell Morgan's solicitors, Hunt & Hunt, that he had witnessed the relevant documents provided in support of the mortgage application. The mortgage was approved and registered, and Mitchell Morgan paid over $1 million into Mr Caradonna and Mr Vella's joint account. Mr Caradonna then withdrew these funds, which were not repaid.
Although the mortgage was duly registered, it was worded (by Hunt & Hunt) so as to only secure money payable by Mr Vella to Mitchell Morgan.
At first glance
At first instance (Vella v Permanent Mortgages Pty Ltd  NSWSC 505), Young CJ in Eq of the Supreme Court of New South Wales held that as Mr Vella was not a party to the fraud, no money was in fact owed and therefore the mortgage secured nothing and should be discharged. Hunt & Hunt was held to be liable to Mitchell Morgan in negligence as it had failed in its responsibility to protect Mitchell Morgan from fraud, because it should have prepared a mortgage containing a covenant to pay a stated amount.
Young CJ in Eq also held that Hunt & Hunt was a concurrent wrongdoer together with Mr Caradonna and Mr Flammia for the purposes of Part 4 of the Civil Liability Act 2002 (NSW). Young CJ in Eq assessed Hunt & Hunt's responsibility at 12.5%, with Mr Caradonna and Mr Flammia bearing 72.5% and 15% respectively.
The key issue before the New South Wales Court of Appeal was whether Hunt & Hunt was a concurrent wrongdoer with Mr Caradonna and Mr Flammia.
A five-member bench of the Court of Appeal overturned the initial decision on the basis that Mr Caradonna and Mr Flammia did not cause the 'same' loss and damage as Hunt & Hunt. This meant that whilst Mitchell Morgan's claim against Hunt & Hunt was still an apportionable claim, Mr Caradonna and Mr Flammia were not concurrent wrongdoers in respect of it.
As a result, Hunt & Hunt's liability to Mitchell Morgan increased from 12.5% to 100%.
In reaching this decision, the Court of Appeal found that:
- There is a well-recognised difference between 'damage' and 'damages'; the former being the personal, proprietary or economic interest that is harmed and the latter being the money sum that is awarded in respect of that harm.
- In pure economic loss claims, damage should not be identified at the eneral level of being financially worse off. Rather, it is necessary to identify (at the correct level) the economic interest and the harm to it.
On the facts of the case, the damage caused by Mr Caradonna and Mr Flammia comprised of Mitchell Morgan paying out money (i.e. advancing the loan funds) when it would not otherwise have done so; whereas the damage caused by Hunt & Hunt's negligence was that Mitchell Morgan did not have the benefit of security for the money paid out.
In reaching its decision, the Court of Appeal approved the Victorian decision of St. George Bank Ltd v Quinerts Pty Ltd  VSCA 245, a case in which borrowers who had failed to repay a loan were found to have caused damage to the lender in the form of the failure to repay the loan, but this was not the 'same' damage as a valuer was found to have caused to the lender in the form of the lender having inadequate security for the loan.
It has been suggested that seeking to divide a loan transaction into its individual components (of serviceability and security, or the promise to pay and the actual repayment) is simply an artificial distinction that should not be drawn. Regardless of one's views on the merits of this argument, practitioners (especially those in the areas of valuer's and/or solicitor's liability) will now need to apply even more forensic attention when advising their clients and pleading proportionate liability.
However, it is important to note that the more favourable proportionate liability cases of Chandra v Perpetual Trustees Victoria Ltd  NSWSC 694 and Kayteal Pty Ltd v John Joseph Dignan & Ors  NSWSC 197, were not expressly overruled by this decision. As it appears that those cases can be distinguished on their facts, there remains scope to apply proportionate liability in suitable cases.
For example in valuer's negligence cases it seems open to argue that in "no transaction" cases, "concurrent wrongdoing" by any number of parties to the creation of the lending transaction such as the borrower, financial broker, valuer, etc., might all be responsible for apportionable losses under Civil Liability legislation, arising out of the lending transaction.
Further, in September 2011, the Standing Committee of Attorneys General released draft model proportionate liability provisions and a Regulation Impact Statement. One of the amendments proposed within that statement was that concurrent wrongdoers not be defined by whether they have caused the 'same' loss or damage, but whether such loss and damage is 'substantially or materially similar'. Indeed, the statement outlines that such an amendment is "intended to avoid legalistic, technical disputes on this issue". It is our hope that such amendments are made swiftly, so as to provide comfort and clarity to those affected by such legalistic/technical disputes (especially valuers) and to better achieve what we consider to be the purpose for which proportionate liability was first introduced.
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