8 September 2013 Andrew P. Downie

Facts

Mr Vella and Mr Caradonna entered into a joint venture and opened a joint bank account for the venture. They attended upon Mr Vella’s solicitors and took possession of certificates of title to 3 of Mr Vella’s properties. At a later time, Mr Caradonna, without the knowledge of Mr Vella, obtained possession of these certificates of title.

Mr Caradonna used one certificate of title as security to obtain a loan of $1million from Mitchell Morgan Nominees Pty Ltd (Mitchell Morgan). Mr Caradonna forged Mr Vella’s signature on the loan and mortgage documentation and Mr Flammia, a lawyer and Mr Caradonna’s cousin, fraudulently certified that Mr Vella executed the loan and mortgage documentation.

The loan and mortgage documents were drawn by Hunt & Hunt Lawyers (Hunt & Hunt), and the mortgage document was expressed in such a way as to secure Mr Vella’s indebtedness by reference to the loan agreement.

Although it was indefeasible because it was registered, the mortgage was ineffective as it secured an amount owing under a void loan agreement. The loan agreement was void because it was procured by fraud, and Mr Vella was not liable under it. Mitchell Morgan sued Hunt & Hunt in negligence, alleging that Hunt & Hunt should have prepared a mortgage containing a covenant to repay a stated amount, rather than a reference to a loan agreement that turned out to be void.

Hunt & Hunt claimed it was a concurrent wrongdoer in respect of a single apportionable claim under the Civil Liability Act 2002 (NSW),[1] which defines a concurrent wrongdoer as ‘a person who is one of two or more persons whose acts or omissions (or act or omission) caused, independently of each other or jointly, the damage or loss that is the subject of the claim’[2]. The issue was whether Hunt & Hunt caused the same damage as the fraudsters such that Hunt & Hunt could properly be regarded as a concurrent wrongdoer.

Lower court decisions

The primary judge held that Hunt & Hunt was liable as to 12.5% on the basis that it was a concurrent wrongdoer and liable for the same loss or damage as the fraudsters.

The New South Wales Court of Appeal (NSWCA), in a decision by Giles JA and followed by the remaining four Judges, held that Hunt & Hunt was not a concurrent wrongdoer as the loss or damage caused by Hunt & Hunt was different from the loss or damage caused by the fraudsters.

In reaching its decision, the NSWCA applied the reasoning of Nettle JA in St George Bank Ltd v Quinerts Pty Ltd[3] (Quinerts) which concerned a negligent valuation and a secured loan based on that valuation. In Quinerts, the concurrent wrongdoers were said to be a defaulting borrower and a guarantor on the one side, and a negligent valuer on the other. In Quinerts, Nettle JA (at [76]) held that the loss or damage caused by the valuer and the defaulting borrower differed. This is because the loss or damage suffered by the conduct of the borrower and guarantor was said to be the failure to pay the loan, whereas the loss or damage suffered by the conduct of the valuer was said to be causing the bank to accept inadequate security.

Following the reasoning in Quinerts, Giles JA held that the loss or damage caused by the fraudsters was ‘paying out money when [Mitchell Morgan]would not otherwise have done so’ and the loss or damage caused by Hunt & Hunt was ‘[Mitchell Morgan] not having the benefit of security for the money paid out’. The NSWCA therefore held that because the loss or damage was different in each case, Hunt & Hunt was 100% liable to Mitchell Morgan.

Majority decision (French CJ, Hayne and Kiefel JJ)

The majority held that Hunt & Hunt was a concurrent wrongdoer with the fraudsters, as their acts caused the same damage, being the inability of Mitchell Morgan to recover the sums advanced. They allowed the appeal except for a separate question of recovery of interest. The latter issue is not considered below.

Their Honours identified two questions that ought to be considered: (1) what is the damage or loss that is the subject of the claim (the harm); and (2) is there a person, other than the defendant, whose acts or omissions also caused that damage or loss (causation) (at [19]).

Their Honours emphasised the difference between ‘damage’ and damages’. The majority then characterized loss or damage in the context of economic loss as the harm suffered to a plaintiff’s economic interests (at [24]). The harm said to be done to Mitchell Morgan’s economic interests was it being unable to recover the sums advanced, and this was its loss or damage for the purpose of the legislation (at [28]).

The majority disagreed with the way that the NSWCA, and the VSCA in Quinerts, characterised the loss or damage caused by the wrongdoers. The types of damage identified by the NSWCA and the VSCA were, in the majority’s view, the causative effects of the conduct, but not the harm (at [28], [29], [34] and [35]).

Their Honours considered that in general terms, in a case involving a loan, damage will be sustained and the cause of action will accrue only when recovery can be said, with some certainty, to be impossible (at [32]). The NSWCA considered that the damage accrued when the money was paid to the fraudsters. The majority disagreed, noting that at that point there was a serious risk that loss would accrue, but it could not be said that Mitchell Morgan’s rights of recovery against the fraudsters was valueless (at [33]).

Further, their Honours noted that the NSWCA, and the VSCA inQuinerts, conducted an inquiry about whether the acts of one wrongdoer contributed to the other, such that it could be seen that they caused the same damage. This was disapproved of, as the legislation acknowledges that the acts may be independent of one another yet cause the same loss or damage (at [41]).

On the question of causation, the relevant inquiry was said to be whether the act or omission of the wrongdoer played some part in contributing to the loss (at [44] and [45]). It was held that Hunt & Hunt had caused the loss (being the inability to recovery the sums advanced), and the relevant inquiry was whether the fraudsters’ acts, independently of Hunt & Hunt, also caused the loss (at [46]).

Analysing this further, their Honours noted that there were two conditions necessary for the mortgage to be ineffective, namely the loan agreement being void (caused by the fraudsters) and the mortgage document being ineffective (caused by Hunt & Hunt) (at [49]). Noting this, it was considered that in a practical sense the fraudsters’ conduct contributed to Mitchell Morgan’s inability to recover (at [50]). Practically speaking, the fraudsters caused Mitchell Morgan to enter into the loan agreement and but for the acts of the fraudsters, there would never have been the need to take a mortgage nor for Hunt & Hunt to draw one. In that sense, the fraudsters’ conduct was considered to be a material cause of the harm which resulted (at [51]), and therefore both the fraudsters and Hunt & Hunt were concurrent wrongdoers.

Finally, their Honours considered that it is not consistent with the policy of the legislation that Hunt & Hunt be held wholly responsible for the damage, when regard is had to the part played by fraudsters’ conduct (at [58]). It seems that the Court considered that making Hunt & Hunt 100% liable for Mitchell Morgan’s loss would not properly account for the seriousness and the impact of the fraudsters’ conduct (at [54]).

Minority decision (Bell and Gageler JJ)

The minority reached the opposite conclusion, holding that Hunt & Hunt was not a concurrent wrongdoer with the fraudsters. The difference arose in the identification and analysis of the loss or damage.

Their Honours considered that when the wrongful act or omission of B is to breach a duty of care that B has to protect A from the consequences of a possible wrongful act or omission on the part of C, the harm to A that is caused by that act or omission lies in the absence of protection in the event that the wrongful act or omission occurs. Further, the consequences of the wrongful act or omission on the part of C are not part of that harm, but are the ‘coming home of the risk that it is the duty of B to take reasonable care to prevent’ (at [94]).

Their Honours held that if B was to become a concurrent wrongdoer with C where B has failed to take reasonable care to protect A from the consequences of a wrongful act or omission on the part of C, the impact of proportionate liability would extend, in effect, to transferring to A some or all of the very risk against which it was the duty of B to protect A from (in the event that B was impecunious, insolvent or untraceable) (at [95]).

Discussion

The main difference in the reasoning between the majority and minority was their respective analyses of what was the harm caused by the fraudsters and Hunt & Hunt.

The importance of the decision of the majority is that it demands a proper characterization and analysis of the loss or damage, being the harm to the economic interest, suffered as a result of the conduct of wrongdoers. The majority warned that the harm not be conflated with the effects of the negligent or fraudulent conduct of the wrongdoers, as the NSWCA did, and as the VSCA did in Quinerts.

The minority looked at the legislation more from a policy perspective, noting that the effect of the legislation, in moving away from joint and several liability, was to effect a shift in risk from the defendant to the plaintiff. The minority considered that where a person is engaged by a client to protect against risk, and that protection is ineffective by reason of that person’s negligence, then allowing that person to be a concurrent wrongdoer effectively shifts the risk, which it was the person’s duty to protect against, onto the client.

A side issue which was raised by all members of the Court was whether the correct reasoning was applied in Quinerts. The High Court noted, but did not decide, the argument of Hunt & Hunt that in Quinerts no loss or damage was caused to the bank by the default of the borrower and guarantor, as this was a claim in debt and not damages (at [42], [75], [77] and [102]). It will be interesting to see what the Courts decide when this issue is raised in future proceedings.

This decision is likely to be viewed positively by the legal, insurance and building professions, as it means a reduction in exposure to claims of the kind seen in Mitchell Morgan and Quinerts.