The year that has been: Proportionate liability in 2013 - key cases and proposed reform

Proportionate liability as a defence to property damage and pure economic loss claims continues to be a complex area with high stakes for defendants and the insurance industry. This article takes a look at key developments in 2013 including the push for legislative reform of the area.

High Court's clarification of concurrent wrongdoers

In April 2013, the High Court handed down its decision in Hunt & Hunt Lawyers v Mitchell Morgan Nominees Pty Ltd (2013) 247 CLR 613. At issue was whether solicitors Hunt & Hunt who drafted an ineffective mortgage for Mitchell Morgan caused the same loss or damage as fraudsters who conspired to induce Mitchell Morgan to lend.

The High Court concluded that both the solicitors and fraudsters had caused the same loss: Mitchell Morgan's inability to recoup its money. There was no need for a connection between the actions of the two concurrent wrongdoers such that one caused or contributed to the others' conduct. For a closer look at this decision see our April 2013 article.

Indemnities and contracting out

In Perpetual Trustee Company Ltd v CTC Group Pty Ltd (No 2) [2013] NSWCA 58, the New South Wales Court of Appeal decided that a contractual indemnity constituted contracting out of proportionate liability.

CTC had introduced Perpetual to a loan transaction that turned out to be a fraud. In failing to exercise reasonable care in identifying the proposed borrower and his authority to submit the loan application, CTC had breached its obligations of care to Perpetual under a Mortgage Origination Deed (MOD).

CTC maintained that its liability should be reduced by reference to the comparative responsibility of the fraudsters. Perpetual resisted on the basis that, by the indemnity provision of the MOD, the parties had contracted out of proportionate liability (as permitted in New South Wales).

The Court of Appeal unanimously agreed that the indemnity had this effect even though its existence pre-dated the proportionate liability regime. It was not necessary for parties to make specific reference to the proportionate liability provisions in order to contract out: "[A]ll that matters is that the contractual indemnity is inconsistent with [proportionate liability]." An interesting (although as yet untested) application of this reasoning would be that such indemnities would not be effective in Queensland where contracting out of proportionate liability is expressly prohibited and possibly not effective in those jurisdictions where the legislation is silent on contracting out.

McFarlan JA went on to deal with other questions regarding the application of proportionate liability to contractual indemnities. His Honour considered that the broad description in proportionate liability legislation of damages as "any form of monetary compensation" was apt to cover a claim for contractual indemnity for loss suffered as a result of a breach of contract.

However, his Honour did not consider that the indemnity claim was within the definition of "apportionable claim" because a failure to exercise reasonable care was not an element of the cause of action. In this regard, McFarlan JA disagreed with the decision of Reinhold v New South Wales Lotteries Corporation (No 2) [2008] NSWSC 187 to the effect that claims could be apportioned where negligence is apparent on the facts but is not an element of the cause of action. Of the other two appeal judges, Meagher JA declined to express a view on this aspect and Barrett JA expressed support for the reasoning in Reinhold.

Proportionate liability unavailable in the FOS process

In Cromwell Property Securities Limited v Financial Ombudsman Service Limited & Ors [2013] VSC 333, the Victorian Supreme Court held that FOS was entitled to determine a referred dispute even though Cromwell was denied the opportunity to raise a proportionate liability defence.

As a term of its financial services licence, to be permitted to provide financial services to retail clients, Cromwell was required to participate in a dispute resolution regime complying with s 912A(2) of the Corporations Act 2001(Cth). To satisfy this condition, Cromwell became a member of FOS.

The Radfords were investors in the Cromwell Property Fund and clients of a financial adviser, Garnaut Private Wealth Pty Ltd. They alleged that disclosure documents associated with their investment were misleading and submitted their dispute to FOS, seeking compensation from Cromwell.

Under its Terms of Reference, FOS has discretion to exclude a dispute if there is a more appropriate place, such as a court, to deal with it. Cromwell maintained that the dispute should be excluded; otherwise, Cromwell would be denied, amongst other things, the opportunity to join Garnaut or raise a proportionate liability defence. FOS refused. To challenge this refusal, Cromwell had to establish that FOS' decision was one which no reasonable decisionmaker could reach.

Digby J found the decision of FOS was reasonable, noting in particular that Cromwell had submitted itself to the FOS regime, that there was nothing "unique or exotic" about the Radfords' claim and that Cromwell was not prejudiced to the extent that it could bring a separate claim for contribution against Garnaut extraneous to the FOS determination. Cromwell has appealed.

Forensic challenges and joining alleged concurrent wrongdoers as extra defendants

In August 2013, the Supreme Court of Western Australia set aside third party proceedings by defendants who sought to claim contribution from an alleged concurrent wrongdoer: Fudlovski v JGC Accounting & Financial Services Pty Ltd (No 2) [2013] WASC 301. The defendants, who relied on proportionate liability in defence of the plaintiff's claim nonetheless maintained that their entitlement to pursue statutory contribution subsisted until the entry of judgment against them.

Martin J disagreed, concluding that proportionate liability removes rights of contribution. A similar finding was made in New South Wales in the Sydney Water decision discussed below. The result may well be different in jurisdictions like Queensland where the right of a concurrent wrongdoer to seek contribution in separate proceedings is explicitly preserved.¹

Martin J went on, however, to express concern about the "forensic headaches" involved in determining the comparative responsibility of an alleged concurrent wrongdoer who is not a party to the action and who, therefore, may not give evidence or discovery and does not have an opportunity to answer the allegations against them.

His Honour noted also the lack of issue estoppel against the non-party concurrent wrongdoer and, therefore, the prospect of differing findings in subsequent proceedings. To address these concerns, the judge expressed a clear preference that where a defendant alleges that there are concurrent wrongdoers, whom the plaintiff does not join, the defendant should apply to join those persons as extra defendants.

Illustrations of apportionment

The following decisions illustrate apportionment in action in 2013.

Sydney Water v Asset Geotechnical Engineering & Ors [2013] NSWSC 1274 involved a claim by Sydney Water Corporation to recover for substantial damage to a sewer main resulting from a landslip. The sewer main was situated on land owned by the Liddys. They had commissioned the construction of a boatshed, which required the excavation of their land.

The Court found that over-steep excavation had caused the landslip and that the owners, the principal contractor Hyde-Page and Asset Geotechnical Engineering were liable in negligence to Sydney Water. Questions of proportionate liability arose.

The owners had been "casually negligent" in failing to comply with a condition of the council's Construction Certificate that the plans be submitted to Sydney Water. Campbell J made clear that the owners were not otherwise culpable, having been entitled to rely on the geotechnical engineer and principal contractor.

While only engaged for an initial "walk over" assessment, the geotechnical engineer was substantially at fault for misconceiving the subsurface condition, failing to observe the sewer main, recommending batters that were too steep and not recommending a land risk management assessment.

The principal contractor was culpable for failing to ensure that the plans were submitted to Sydney Water and that the geotechnical engineer was recalled for advice once the excavation revealed the true site conditions.

Liability was apportioned 65% to Asset Geotechnical, 25% to Hyde-Page and 10% to the Liddys. Allegations that the council (a non-party) and excavation contractor (a cross-defendant) were also concurrent wrongdoers were rejected as

those parties were found not to have been negligent.

In Seirlis v Bengtson [2013] QSC 240, the plaintiff purchased an apartment in Brisbane's Riparian Plaza in reliance on representations that the apartment had three carpark spaces. In fact, it had two spaces and a storage area with a raised concrete plinth. Other owners used their storage areas as a carpark but this was not permitted under the development approval. Despite this, the apartment had been advertised as having three spaces and at one stage, the individual selling agent undertook to have the plinth removed.

The plaintiff sued the vendors and the sales agents, Hadgelias Holdings Pty Ltd and its independent contractor, Waight. Hadgelias was liable for misleading and deceptive conduct under s52 of the old Trade Practices Act 1974 (Cth). The vendors were also liable under s75B of the TPA as persons knowingly concerned in the corporate agent's misleading conduct: it was the vendors who knew that use of the storage area for parking was unlawful but instructed the agents to advertise three carparks.

The individual agent, Waight, was liable for misleading conduct under the Fair Trading Act 1989 (Qld) for his misrepresentation that the plinth would be removed. However, there was no scope for proportionate liability to operate because:

• The vendors had suggested no fact or circumstance from which it would be appropriate to reduce their liability.
• Hadgelias' misleading conduct was one and the same as the vendors and did not attract apportionment under s87CD of the TPA.
• As to Waight, in Queensland, a concurrent wrongdoer who contravenes the misleading conduct provisions of the Fair Trading Act remains severally liable.²

In Bird v Ford [2013] NSWSC 264, the parents of a child expelled from school unsuccessfully applied for judicial review of the school's decision. They then sued the solicitor whom they alleged failed to advise them that they had no case. They failed in that claim too but relevantly, the Court considered whether, had the plaintiffs succeeded, the claim against the solicitor could have been reduced having regard to the comparative responsibility of the barrister he briefed.

Although immune from suit (and, therefore, not liable to the parents or the child), Schmidt J considered that the barrister could have been a concurrent wrongdoer had negligence been established. This is an interesting decision to the extent that immunity from suit would not preclude a party being a concurrent wrongdoer.

In Norcast Sarl v Bradken Ltd (No 2) (2013) 302 ALR 486, the Federal Court found that the respondents had breached the anti-cartel bid rigging provisions, as well as the misleading and deceptive conduct provisions, of the Competition and Consumer Act 2010 (Cth) by dealings with Castle Harlan Inc, a US private equity investment firm.

Without disclosing Bradken's involvement, Castle Harlan purchased the applicant's subsidiary (a Canadian mining consumables company and a competitor to Bradken) and promptly on-sold that company to Bradken.

Although not decisive in the outcome, the Court considered a submission that the respondents' liability on the misleading and deceptive case should be significantly reduced having regard to the culpability of Castle Harlan, which the respondents alleged was the "active wrongdoer".

Bradken was found to have engaged in misleading conduct directly by its silence. Bradken and two of its directors were also found liable as persons knowingly concerned in the misleading conduct by Castle Harlan and in that regard (although apparently not in respect of Bradken's direct liability), sought to rely on proportionate liability.

However, the Court found it was just that there be no reduction in liability for Bradken which had "started the [collusive] process" or for the directors who were "the authors of it". This is consistent with Seirlis v Bengtson as to the unavailability of apportionment between parties liable for misleading conduct and those knowingly concerned in the same contraventions. Gordon J's reasons could also be interpreted as suggesting that it may still be just for a party to bear 100% liability even though a non-party is also at fault.

Proposed reforms

Concerns about the clarity of certain provisions and inconsistencies between jurisdictions have plagued the proportionate liability regimes since their inception.

Following reviews by solicitor, Tony Horan, and Professor JLR Davis, draft model legislation was released in 2008 and subject to extensive stakeholder submissions. Following its October 2013 meeting, the Standing Council on Law and Justice (SCLJ), released fresh Model Provisions and a Decision Regulation Impact Statement (RIS) about those provisions. The main amendments contemplated in the Model Provisions are:

1. An "apportionable claim" would be defined in terms of a claim for economic loss or property damage (in contract, in tort, under statute or otherwise) where a failure to take reasonable case is an element of the claimant's action; alternatively, as a claim under the Australian Consumer Law (or predecessor provisions) for misleading or deceptive conduct. The requirement, under the first limb, that the failure to take reasonable case be an element of the claimant's action would remove the arguable application of proportionate liability to breaches of strict contractual duties (s2(2) Model Provisions).
2. The exemption of consumer claims from proportionate liability would remain (s2(3)(c) Model Provisions).
3. Any doubt about the ability of arbitrators and other external dispute resolution bodies to make binding decisions without applying proportionate liability would be removed (s3 Model Provisions).
4. The requirement for a concurrent wrongdoer to be, or to have been, liable to the claimant would be confirmed (s4(1)(b) Model Provisions).
5. Liability could be apportioned by reference to a concurrent wrongdoer who is not a party to the proceeding (contrast the current position in Victoria), although a defendant would be required to give the claimant, the court and, if possible, the alleged concurrent wrongdoer, information it has about the identity and location of the concurrent wrongdoer and the circumstances which make the defendant believe that person is, or may be, a concurrent wrongdoer (ss6 and 7 Model Provisions).
6. A defendant would also be required to give a copy of the pleadings alleging proportionate liability to the alleged concurrent wrongdoer. It would also be confirmed that the defendant has the burden of establishing a prima facie case against the concurrent wrongdoer (s8(4) and (5) Model Provisions).
7. The claimant's ability to bring subsequent proceedings against other concurrent wrongdoers would be preserved; however, the claimant would need leave of the court where the new defendant is someone the claimant was informed about in the earlier proceeding. The claimant would not be entitled to costs in the subsequent proceedings either unless the court is satisfied that there were reasonable grounds for separate proceedings (s10 Model Provisions).
8. Contracting out of proportionate liability (currently permitted in New South Wales, Western Australia and Tasmania) would be prohibited, except for arbitrations or external dispute resolution regimes as mentioned and agreements made between concurrent wrongdoers for contribution or indemnity (s12 Model Provisions).

The Commonwealth, State and Territory ministers agreed to consider making such reforms (or some variation of them) but it remains to be seen whether this process will gather greater momentum than has been the case to date.

Footnotes

¹s32H Civil Liability Act 2003 (Qld).
²s32F Civil Liability Act 2003 (Qld).

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.