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Uncertainty Continues for the Proportionate Liability Regime in Australia


In two recent cases, the Full Court of the Federal Court of Australia has considered the issue as to whether the proportionate liability provisions in the Commonwealth legislation apply in circumstances where a plaintiff has a number of causes of action against two or more defendants for the same loss or damage, notwithstanding that not all of the plaintiff's causes of action are apportionable claims.

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WEALTHSURE PTY LTD V SELIG [2014] FCAFC 64

On 30 May 2014, the Full Court of the Federal Court of Australia delivered its judgment in Wealthsure Pty Ltd v Selig [2014] FCAFC 64 (Wealthsure v Selig).

Facts

Mr and Mrs Selig invested in a company, Neovest Pty Ltd (Neovest), upon the advice of Wealthsure Pty Ltd (Wealthsure) and Mr Bertram, a representative of Wealthsure. Neovest ultimately failed. 

The Seligs brought a claim for damages against Wealthsure, Mr Bertram and the directors of Neovest for a number of alleged breaches of the Corporations Act 2001 (Cth) (Corporations Act), the Australian Securities and Investments Commission Act 2001 (Cth) (ASIC Act), and the common law of contract and negligence. One of the Seligs' claims was a claim for misleading and deceptive conduct under s 1041H of the Corporations Act, which is an apportionable claim under s 1041L of the Corporations Act.

Decision

By a majority of 2-1, the Court held that the whole of the claim against Wealthsure and Mr Bertram should be apportioned, notwithstanding that the Seligs' had succeeded in other causes of action which were non-apportionable claims. 

The interpretation of s 1041L(2) of the Corporations Act was of critical importance in the decision reached by the majority. Section 1041L(2) of the Corporations Act provides as follows:

"…there is a single apportionable claim in the proceedings in respect of the same loss or damage even if the claim for the loss or damage is based on more than one cause of action (whether or not of the same or a different kind)."

The majority, Mansfield and Besanko JJ, found that the above provision indicates a legislative intention that the proportionate liability provisions are to be engaged in circumstances where different causes of action have caused the same loss or damage, notwithstanding that not all of the causes of action are apportionable claims. 

In contrast, White J in dissent held that s 1041L(2) of the Corporations Act only applies to apportionable claims.  He found that the expression "based on more than one cause of action" in this provision should be read as referring only to causes of action which are apportionable claims, rather than to causes of action in general.

ABN AMRO BANK NV V BATHURST REGIONAL COUNCIL [2014] FCAFC 65

Shortly after the decision in Wealthsure v Selig, on 6 June 2014, the Full Court of the Federal Court delivered its decision in ABN AMRO Bank NV v Bathurst Regional Council [2014] FCAFC 65 (ABN AMRO v Bathurst).

Facts

This case involved a number of parties, and the facts of the matter are complex and lengthy. At its core, the case involved issues surrounding the provision of financial advice concerning a structured financial product and the subsequent sale and marketing of this product, which relied on the previous financial advice. 

The Full Court of the Federal Court was required to consider a number of issues on appeal.  Relevantly, one of the key issues was whether the damages awarded to the successful parties could be apportioned.  Damages had been awarded for misleading and deceptive conduct under s 1041H of the Corporations Act, which was an apportionable claim, and for providing false and misleading statements in contravention of s 1041E of the Corporations Act, which was a non-apportionable claim.

Decision 

In a unanimous verdict, Jacobson, Gilmour and Gordon JJ held that the proportionate liability provisions in the Corporations Act only apply in respect of conduct that contravenes s 1041H of the Corporations Act, which is the misleading and deceptive conduct provision. 

The Court noted the recent decision of Mansfield and Besanko JJ in Wealthsure v Selig, but ultimately agreed with the conclusion reached by White J in Wealthsure v Selig, that s 1041(2) of the Corporations Act should be read as referring only to causes of action which are apportionable. 

In reaching its decision, the Court also focused on s 1041L(1) of the Corporations Act, which provides that the proportionate liability provisions only apply if the claim is:

"…a claim for damages…for economic loss or damage to property caused by conduct that was done in contravention of section 1041H."

The Court noted that liability for misleading and deceptive conduct under s 1041H of the Corporations Act may arise even where the conduct is innocent, and there is no allegation that the defendant knew or ought to have known that the conduct it engaged in was misleading or deceptive.  In contrast, s 1041E of the Corporations Act requires actual or constructive knowledge or recklessness. 

Accordingly, the Court found that the express reference to s 1041H in s 1041L(1) of the Corporations Act indicates that the legislature intended to exclude defendants whose conduct is deliberate or reckless (such as those defendants who are found in contravention of s 1041E of the Corporations Act) from the benefit of the proportionate liability regime.

The Court therefore held that:

  1. the damages awarded for misleading and deceptive conduct under s 1041H of the Corporations Act were apportionable between the wrongdoers; and

  2. the successful parties' were entitled to joint and several judgments against the wrongdoers for the provision of false and misleading statements that contravened s 1041E of the Corporations Act.

Noting that both of the causes of action under ss 1041E and 1041H resulted in the same loss or damage, the Court ultimately held that the successful parties could elect which remedy they were seeking.  In this context, the Court found that it was self-evident in the cross-appeal brought by the successful parties that the cause of action they relied upon was a contravention of s 1041E of the Corporations Act, and that the remedy they were seeking was an award of damages for which each wrongdoer was jointly and severally liable.

Impact of the Decisions

Although both cases focus on the interpretation of the proportionate liability provisions in the Corporations Act, it was held in both cases that the decisions apply to the equivalent provisions in the ASIC Act and the Competition and Consumer Act 2010 (Cth). 

Neither case commented on whether the interpretations given to the Commonwealth proportionate liability provisions extend to the State proportionate liability regimes.  However, it is likely that the judgments will be influential (albeit non-binding) on the State Courts in New South Wales, the Australian Capital Territory, Western Australia, the Northern Territory and Tasmania, as the proportionate liability provisions in these States contain similar wording to the provisions in the Commonwealth legislation. 

It remains to be seen how the two contrary judgments from the Full Court of the Federal Court will be applied in the future, and which view will be preferred. If the broad interpretation favoured by the majority in Wealthsure v Selig prevails, this will have a number of benefits for insurers and insureds alike, including:

  1. It will enable insurers to more accurately underwrite risks; ·                         

  2. It will reduce the amount of damages payable by insurers; ·                          

  3. It will prevent professional service advisors from being joined to legal proceedings on the basis that they are insured and therefore have the "deepest pockets"; and 

  4. It will enable insurers to offer premiums at levels which are appropriate and reasonably priced.

If the narrower approach advanced in ABN AMRO v Bathurst and by White J in Wealthsure v Selig is followed, this will benefit plaintiffs, including insurers acting through a right of subrogation. A plaintiff will be able to circumvent the proportionate liability regime if it succeeds in a cause of action that is non-apportionable, and will therefore be entitled to recover damages on the basis that the defendants are jointly and severally liable.

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