Australia: Proportionate Liability Involving a MOD: The Quadrophenia of Contractual Indemnities

Perpetual Trustee Company Ltd v CTC Group Pty Ltd (No 2) [2013] NSWCA 58

In Brief

• Where a party to a contract provides an indemnity which is clearly inconsistent with the principles of proportionate liability, the indemnity will work to oust the function of proportionate liability provision and render a party liable for the entirety of the damages of a breach.
• There remains a degree of confusion over how a Court will determine if a cause of action arises out of a failure to take reasonable care, for the purposes of proportionate liability, with some balance needing to be struck between relying on the manner in which the claim is pleaded and on the facts that are determined at hearing.

Background

This judgment resulted from a Notice of Contention by CTC Group Pty Ltd (CTC) in relation to the previous Court of Appeal judgment involving these parties, Perpetual Trustee Company Ltd v CTC Group Pty Ltd² . This most recent judgment only concerns itself with whether CTC could avail itself of the protection of the proportionate liability provisions under Part 4 of the Civil Liability Act 2002 (NSW) (CLA).

The proceedings, generally, related to a secured loan that CTC had submitted (via a manager) to Perpetual Trustee Company Ltd (Perpetual) by which $480,000 was to be paid by Perpetual to a Mr David El-Bayeh. This was obtained pursuant to a Mortgage Origination Deed (MOD) which attached a form of application signed by Mr El-Bayeh and a document signed by CTC verifying the identity of the applicant. Following default of the mortgage proceedings were brought against Mr El-Bayeh but the Court found that the relevant documents had, in fact, been fraudulently signed by Mr El-Bayeh's brother, Youssef.

In the same proceedings, Perpetual argued, in the alternative, that CTC had breached terms of the MOD by failing to ensure the identity of the proposed borrower. On appeal it was found that CTC did breach its obligations under the CTC. However, confusion during the appeal hearing resulted in the argument regarding proportionate liability being incompletely addressed by the parties and treated by the Court as abandoned. The Notice of Contention sought to have those issues reheard and was allowed on that basis.

Proportionate Liability and an Indemnity

Perpetual argued that CTC should not gain the benefit of having its liability reduced in accordance with the principles of proportionate liability. Their primary argument was that the MOD contained a clause by which CTC provided an indemnity to Perpetual against any liability or loss arising from, amongst others, any breach by CTC of its warranties or obligations under the MOD.

Macfarlan JA, with who Meagher and Barrett JJA agreed, found that the indemnity clause made express provisions for the rights of Perpetual and liabilities of CTC that are inconsistent with the application of Part 4 of the CLA. Perpetual would be deprived of its contractual right to a full indemnity if proportionate liability applied and so s 3A(2) of the CLA applied to allow the parties to make express provisions as to their rights and liabilities without being limited by the CLA.

CTC argued the Court should not conclude that the parties intended to 'contract out' of the proportionate liability provisions as the MOD had been entered into before the apportionment provisions came into force. The Court found that this was an irrelevant consideration as s 3A does not require the parties to use any particular wording to effectively contract out of a provision and no reference needs to be made to the provisions that are contracted out of. All that is required is that the contractual indemnity is inconsistent with the functioning of the CLA.

Thus, the Court found that CTC was not entitled to reduce its liability by reliance on part 4 of the CLA. It was not necessary for the Court to consider any of CTC's further arguments but, for the sake of completeness, one further point of interest was considered by the Court with differing positions taken by each justice.

A Failure to Take Reasonable Care

Perpetual submitted that its claim against CTC was not one 'arising from a failure to take reasonable care', a requirement for a claim to be considered an 'apportionable claim' for Part 4 of the CLA.

Perpetual admitted that its claim was partially based on CTC's failure to take reasonable care but other bases of the claim were not reliant on any failure to take reasonable care on CTC's part. In this regard, Perpetual submitted that its claim for an indemnity under the MOD was not reliant on any failure to take reasonable care.

Macfarlan JA stated that for an action to have arisen from a failure to take reasonable care, it was necessary for that failure to be an element of the cause of action relied on. His Honour argued that if it was only necessary to show negligence on the facts, without it being an element of the cause of action, it would produce the absurd result that the party in breach of a contract could obtain the benefit of the protection of proportionate liability if it could show it was negligent rather than innocent. His Honour suggested that this was in contrast to the view taken by Barret J (as he then was) in Reinhold v New South Wales Lotteries Corporation (No 2) ³ (Reinhold).

Barrett JA disagreed with Macfarlan JA, noting that the point His Honour made in Reinhold was the nature of the claim for the purposes of Part 4 of the CLA cannot be determined without taking into account the Court's decision on the claim. Regard will, necessarily, be given to the way in which the claim is phrased but simply pleading a matter to look like an apportionable claim is not sufficient to have a defendant deemed a concurrent wrongdoer. His Honour stated that it must be a combination of the manner in which a claim is pleaded and the actual findings at hearing that determine whether a defendant will be a concurrent wrongdoer and will have the protection of proportionate liability.

Meagher JA preferred not to express a view on this issue, but noted that the claim which may or may not arise out of a failure to take reasonable care is one that has been determined and established as a source of liability, and this was a key point made in Reinhold. His Honour also noted, without making any finding in this regard, that the only basis on which the Court found CTC was liable to Perpetual was that CTC had failed to take reasonable care in identifying the proposed borrower and confirming his authority to enter the mortgage.

Implications

This judgment reaffirms the previous Tasmanian decision of Aquagenics Pty Ltd v Break O'Day Council ⁴ in stating that parties can contract out of the proportionate liability. The only requirement for contracting out of Part 4 of the CLA is for the parties to contractually redistribute their rights and liabilities in a manner which is inconsistent with the operation of the provisions in Part 4. Matters which will not impact on a finding that the parties have contracted out include:

1. whether or not the contract specifically references the proportionate liability provisions or the parts of the CLA that are being affected;
2. whether or not the contract was entered into before the commencement of the proportionate liability provisions;
3. whether or not the contract was a standard format contract; and
4. whether or not any particular wording was used in the contract,

as a court will rely on the usual rules of contractual interpretation to determine whether any inconsistency exists between the terms.

With regards to the discussion on what constitutes 'an action for damages (whether in contract, tort or otherwise) arising from a failure to take reasonable care' it is clear that this remains a live issue. It would be reasonable to say that a Court will look poorly on any party who attempts to phrase pleadings in such a manner as to exclude proportionate liability. There remains a question, though, as to whether a Court will find that a claim is an apportionable claim due to the facts of the matter where it is uncertain whether the cause of action requires a failure to take reasonable care.

Footnotes

¹ Macfarlan, Meagher and Barrett JJA

² [2012] NSWCA 252

³ [2008] NSWSC 187

⁴ [2010] TASFC 3

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