Apportionment of the liability necessarily involves an exercise of judicial discretion.
How will a court apportion liability between multiple wrongdoers where one of the wrongdoers stands out as being a fraudster? The Victorian Supreme Court recently considered this issue in Solak v Bank of Western Australia Ltd .
The case involved a claim by Mr Solak against Bank of Western Australia Limited, Kheirs Financial Services and Aussie Home Loans entities alleging a fraudulent mortgage of his property to Bankwest in 2006.
In or about 2002, Bankwest entered into an origination agreement with Aussie. The agreement required Aussie to comply with procedures including provision of client information and provision of a properly completed and signed signature identification statement in Bankwest's standard form.
Aussie, in turn, had an agreement with Kheirs whereby Kheirs introduced potential customers to Aussie who would then be matched to financiers such as Bankwest. The agreement required, as an essential condition, the identification by Kheirs of the customer in face-to-face personal interviews.
In about 2006, a person purporting to be Mr Solak telephoned Kheirs to apply for a loan. He then faxed to Kheirs copies of the requisite documentation. Neither Mr Kheirs nor Aussie sighted the original documents or met with the fraudster face-to-face when preparing the application forms. When completing the forms, Mr Kheirs called a representative of Bankwest to ask him questions about the remote application. However, neither Mr Kheirs nor the Bankwest representative turned their minds to the identification issue (given that the applicant was interstate) during that telephone conversation.
Also, there were deficiencies as to how the 100 point signatory identification form was completed by Kheirs.
The judge observed that the apportionability of claims under statute depended fundamentally upon whether the claim was one "arising from a failure to take reasonable care". This was so even if the claims in the court case did not specifically refer to a failure to take reasonable care.
The task of apportioning liability amongst concurrent wrongdoers was to be undertaken in a "real and pragmatic sense" to identify who is to blame for the loss and who should bear the liability. The primary focus was to determine, as best as possible, the causal potency of the various factors which singularly or together went to bring about the loss caused. In Pagone J's view, if no liability is attributed to the fraudster, the apportionment between Kheir, Bankwest and Aussie should be 70%, 30% and 0% respectively.
The judge noted that the position of the fraudster complicated the apportionment. He referred to:
- the decision of Ginelle Finance Pty Ltd v Diakakis where 90% of the responsibility was apportioned to the fraudster (and 10% to the solicitor) and Chandra v Perpetual Trustees Victoria Ltd where almost identical result was reached
- Vella v Permanent Mortgages Pty Ltd where Young CJ said that it would be wrong to say Ginelle and Vella compel subsequent courts to reach the same apportionment in similar cases but that they did provide guidance.
The judge observed that, in some cases, the fraud is not the "operative cause" but is "no more than the setting in which loss is caused by the action of others" or is "a pre-condition to an apportionable loss".
In the court's view, there was no prohibition on apportioning liability to the fraudster where (as in the present case) the fraudster's conduct was "plainly part of the causative elements resulting in the loss". However, if moral blameworthiness were the overriding criteria to determine apportionment, then the fraudster's portion of liability would "swamp" that of the others. The primary focus of the apportionment legislation was not to give expression to moral sanction but to apportion the loss as between operative causes. In the end, the judge concluded that the apportionment in this case should be 50% to the fraudster, 35% to Kheirs and Mr Kheirs (jointly) and 15% to Bankwest.
The court's apportionment to the fraudster is more favourable to the plaintiff than the 90% apportionment in Ginelle. Nonetheless, it had the effect of decreasing Bankwest's ability to recover its losses to 35% compared to 70% if no liability was apportioned to the fraudster.
Where to from here
The fact that a court may apportion liability to a fraudster who is not a party to the proceedings may have a significant adverse impact on a plaintiff's ability to recover its loss.
As a practical matter, in cases involving fraud, a plaintiff should consider the pros and cons of early settlement including the relative culpability of the fraudster for the plaintiff's loss as compared with the other defendants and whether the plaintiff itself may be contributorily negligent.
Upon discovering fraud, lenders should promptly take steps to trace and recover the proceeds – rather than solely relying on contractual indemnities from third parties (such as brokers, loan introducers, valuers and solicitors) who may have contributed to the loss.
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