Australia: Proportionate liability as a defence to cheque conversion claims

A recent decision of the NSW Supreme Court in a cheque conversion claim has left the gate open for banks to rely on the proportionate liability defence under Civil Liability legislation to reduce their liability when sued in conversion as the collecting bank of cheques.

Background

In ASF Resources Ltd v Clarke & Ors¹, the 'recipient bank' was the collecting bank for cheques which were alleged to have been obtained by the fraud of a consultant retained by the plaintiffs (Clarke).

The plaintiffs sued the recipient bank in conversion of the said cheques.

In defence of the conversion claim, the recipient bank argued that:

• it acted in good faith and without negligence when it collected the cheques, relying on section 95(1) of the Cheques Act 1986 to this end, and
• it is entitled to rely on Part 4 of the Civil Liability Act ie to the extent that it is liable to the plaintiffs in conversion, its liability should be apportioned (proportionate liability defence).

The plaintiffs filed a motion seeking orders that the recipient bank's defences, both the defence under the Cheques Act and its proportionate liability defence, be struck out.

Proportionate liability defence

The issue before the Court centred on whether the plaintiffs' claims against the recipient bank as the collecting bank were 'apportionable claims' and, therefore, subject to Part 4 of the Civil Liability Act.

The recipient bank argued that under section 34(1)(a) of the Civil Liability Act, the four threshold requirements to be satisfied for there to be an apportionable claim, were that:

1. the claim is for economic loss or damage to property
2. the claim is in an action
3. the action is for damages (whether in contract, tort or otherwise), and
4. the claim (or action for damages) is one "arising from" a failure to "take reasonable care".

The Court was satisfied that the first three threshold requirements were met. The real question then to be determined was whether the plaintiffs' claim was one "arising from" a failure to "take reasonable care".

Decision

The Court dismissed the plaintiff's motion. In finding for the recipient bank, the Court held that as the recipient bank's defence under section 95(1) of the Cheque's Act was to proceed, there was merit in allowing the recipient bank to present its case in various ways, including invoking Part 4 of the Civil Liability Act. In particular, the Court indicated that it was well satisfied "that there is much to be said for both sides of the argument".

In reaching its decision, the Court also said that the Civil Liability Act is a "significant and groundbreaking piece of law reform", and noted that in the recent High Court decision in Hunt & Hunt Lawyers v Mitchell Morgan Nominees Pty Ltd (No 2),² the Civil Liability Act had already produced a diversity of views across three levels of judicial hierarchy in NSW. As a matter of policy, the Court considered it to be an undesirable exercise (unless absolutely necessary) to construe a piece of legislation such as the Civil Liability Act outside a factual context determined after a full hearing.

Conclusion

The result of this decision is that, depending on the circumstances of the case, banks may now have the option of employing the Civil Liability Act to potentially reduce their liability when sued in conversion as the collecting bank of cheques.

Footnotes

¹[2014] NSWSC 252.
²(2013) 247 CLR 656.

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