Landmark High Court decision on proportionate liability

Selig and Anor v Wealthsure Pty Ltd and Ors [2015] HCA 18

In a landmark decision which will have far reaching ramifications and be warmly received by plaintiff lawyers, the High Court has curtailed the reach of the proportionate liability regime.

This development should certainly be brought to the attention of all property and financial lines underwriters and claims managers.

Factual background

Mr & Mrs Selig invested $450,000 in Neovest Ltd, based upon the financial advice of Mr Bertram, who was an authorised representative of Wealthsure Pty Ltd (Wealthsure).  Unfortunately the investment was actually part of a Ponzi scheme which failed and Mr & Mrs Selig lost their initial investment and suffered consequential losses.  They accordingly sought damages against several parties, including Wealthsure and Mr Bertram.

Mr & Mrs Selig claimed that Weathsure and Mr Bertram had contravened a number of provisions of the Corporations Act 2001 (Cth) (the Act) and the Australian Securities and Investments Commission Act 2001 (Cth) (the ASIC Act), including section 1041H of the Act. Section 1041H prohibits conduct, in relation to a financial product or service that is misleading or deceptive, or is likely to mislead or deceive. Section 1041L in Div 2A of the Act defines an “apportionable claim” as a claim for loss or damage “caused by conduct that was done in a contravention of section 1041H”.

At first instance judgment in the Federal Court was entered against Wealthsure, Mr Bertram and two other defendants in the sum of $1,760,512, meaning the Seligs could recover the entire judgment from any of the defendants.

Appeal to Full Federal Court

The issue before the Full Federal Court was whether the damages attributable to causes of action founded on the non-apportionable sections of the Act and the ASIC Act should also be decided on a proportionate basis by virtue of the finding on section 1041H, so that each defendant was only liable to the extent of their own responsibility.

The Full Federal Court held that all of the causes of action should be decided on a proportionate basis.  Mansfield J said that the deciding factor for proportionate liability provisions is whether the claims are in respect of the same loss or damage, as opposed to the nature of the claim itself.  Even though the defendants were liable under other provisions of the Act/the ASIC Act as well as section 1041H, the claim was apportionable because the conduct giving rise to that loss or damage was conduct in contravention of section 1041H.

This decision left Mr & Mrs Selig in the position of having to recover 40% of their losses from impecunious fraudsters. They obtained special leave to appeal to the High Court.

High Court decision

The High Court overturned the decision of the Full Federal Court. It held that an “apportionable claim” for the purposes of Div 2A of the Act is, relevantly, a claim based upon a contravention of section 1041H. The term does not extend to claims based upon conduct of a different kind, and therefore the proportionate liability regime established by Div 2A does not apply to other statutory or common law causes of action. The Court held that this reasoning applied equally to the corresponding provisions of the ASIC Act. Therefore, Mr & Mrs Selig are entitled to recover all their losses pursuant to the non-apportionable causes of action from Wealthsure.

The High Court further held that the circumstances justified an award of costs against a non-party to the proceedings, Wealthsure’s professional indemnity insurer. The insurer had the conduct of the defence at trial and made the decision to appeal to the Full Federal Court. As Wealthsure’s cover under the policy had reached the limit of liability, the decision to appeal meant that insurance proceeds which it would otherwise have been obliged to pay Mr & Mrs Selig would have to be diverted to meet the insurer’s legal costs. The Court held that as the insurer was acting for itself in seeking to better its position by bringing the appeal, there was no reason it should be regarded as immune from a costs order.

Implications

The decision reverses the findings of the appeal to the Full Federal Court, which had followed the reasoning in Hunt & Hunt Lawyers v Mitchell Morgan Nominees Pty Ltd and Others1 to the extent that the focus should be upon the “nature of the loss and damage…rather than upon the nature of the…causes of action”. The decision is in line with another Full Federal Court decision in ABN AMRO Bank NV v Bathurst Regional Council2. 

The decision will be seen as favourable to plaintiffs as it preserves the position that proportionate liability can only be pleaded where the relevant provision (whether in the Corporations Act, the Trade Practices Act 1974/Competition and Consumer Act 2010 or in state legislation) explicitly imposes it.  If the provision does not require the apportioning of liability for the cause of action, apportionment of the relevant damages will be on a joint and several basis.

The third party costs order against Wealthsure’s insurer should be a warning to insurers, particularly for professional indemnity policies, where the policy limit can often come in to play.  The High Court’s decision demonstrates that in some circumstances Courts will be prepared to look behind the parties to the proceeding to make non-party costs orders directly against insurers.

1(2013) 247 CLR 613; [2013] HCA 10
2[2014] FCAFC 65