Australian Proportionate Liability Regime

Australian Proportionate Liability Regime May 2014 16 NOVEMBER 2011 Curwoods Lawyers Australia Square Plaza Building Level 9, 95 Pitt Street SYDNEY NSW 2000 t +61 2 9231 4166 f +61 2 9221 3720

CURWOODS LAWYERS Contact us Paul Garnon Partner t +61 2 8231 6204 e peter.garnon@curwoods.com.au Yasmin Bell Senior Associate t +61 2 8023 7924 e yasmin.bell@curwoods.com.au Nicholas Lawrence Solicitor t +61 2 8023 7946 e nicholas.lawrence@curwoods.com.au {PAG / 01829667}

CURWOODS LAWYERS Contents Page Introduction... 1 What is an "apportionable claim"?... 1 Excluded claims... 2 Who is a "concurrent wrongdoer"?... 3 Procedural matters... 4 Assessment... 5 Contractual indemnities and contracting out... 6 Settlement and proportionate liability... 7 Subsequent actions... 7 The model provisions... 8 Conclusion... 8 {PAG / 01829667} i

CURWOODS LAWYERS Introduction Proportionate liability is concerned with fixing a proportion of liability to a defendant so as to reflect that defendant's responsibility for the loss or damage suffered by the plaintiff. All Australian States' jurisdictions, and some Commonwealth legislations, have enacted proportionate liability provisions, creating a reasonably consistent model for the determination of proportionate liability 1. There remain some small but significant differences between jurisdictions, but this paper will primarily concern itself with the New South Wales (NSW) regime. In NSW, proportionate liability provisions fall under Part 4 of the Civil Liability Act 2002 (NSW) (CLA) 2. Prior to the enactment of Part 4 of the CLA, each wrongdoer was jointly and severally liable for the whole amount of the plaintiff's loss. Under joint and several liability, the plaintiff can sue or enforce a judgment against one or a number of wrongdoers. This allows the plaintiff to enforce any judgment against only the liable defendant most likely to be able to meet the judgment debt. If a defendant is entitled to the protection of proportionate liability, the defendant pays only the part of the plaintiff's loss which is apportioned against it. The plaintiff bears the risk of any concurrent wrongdoer being insolvent or absconding. What is an "Apportionable Claim"? The first issue in assessing whether a claim will attract the rules of proportionate liability under the CLA is whether the claim is an "apportionable claim". Section 34(1) provides that the following are "apportionable claims": (a) (b) A claim for economic loss or damage to property in an action for damages (whether in contract, tort or otherwise) arising from a failure to take reasonable care, but not including any claim arising out of personal injury; A claim for economic loss or damage to property in an action for damages under the Fair Trading Act 1987 for a contravention of s 42 of that Act (as in force before its repeal by the Fair Trading Amendment (Australian Consumer Law) Act 2010) or under the Australian Consumer Law for a contravention of s 18 of that Law 3. 1 2 3 Wrongs Act 1958 (Vic); Civil Liability Act 2002 (WA); Civil Liability Act 2003 (Qld); Civil Law (Wrongs Act) 2002 (ACT); Proportionate Liability Act 2005 (NT); Civil Liability Act 2002 (Tas); Law Reform (Contributory Negligence and Apportionment of Liability) Act 2001 (SA); Trade Practices Act 1974 (Cth); Corporations Act 2001 (Cth); Australian Securities and Investment Commission Act 2001 (Cth); Australian Consumer Law (Cth). See annexure B for the complete wording of Part 4 of the CLA. These sections are in relation to misleading and deceptive conduct. {PAG / 01829667} 1

In assessing whether a claim is an "apportionable claim", the courts will not only consider the form of the claim, but also its substance. A contractual claim can still be an apportionable claim even if the plaintiff does not plead a failure to take reasonable care. The test is not how the claim is pleaded by the plaintiff, but whether the claim, at its heart, is based on the failure of a defendant to take reasonable care. However, there remains some dispute over what, precisely, is the heart of the matter that must be considered. Firstly, the scope of what constitutes "an action for damages" has a very broad meaning, encompassing any form of monetary compensation including claims for equitable compensation 4. As such, a wide variety of claims will pass this first hurdle, regardless of whether they are for common law damages, but so long as they involve almost any form of monetary compensation (with exceptions for payments under industrial instruments, superannuation and life insurance). Generally, there is a presumption that a claim for damages for breach of a contractual term that has nothing to do with taking reasonable care is not apportionable. The Victorian Court of Appeal held that a claim by a bank suing on a Deed of Guarantee did not arise "from a failure to take reasonable care" because the bank was, in effect, seeking specific performance of the contract of guarantee 5. However, this approach was the subject of further judicial review in Perpetual Trustee Company Ltd v CTC Group Pty Ltd (No 2) 6. Unfortunately, all three justices came to different conclusions in this matter. Excluded claims The CLA provides various parties and claims are excluded from being considered concurrent wrongdoers including: Personal injury claims A defendant intending to cause the loss or damage A defendant fraudulently causing the loss or damage An intentional act that is done with intent to cause injury or death, or that is sexual assault or other sexual misconduct Dust diseases claims Workers compensation claims Compensation for victims of crime Discrimination claims. CURWOODS LAWYERS 4 5 6 George v Webb [2011] NSWSC 1608 Commonwealth Bank of Australia v Witherow [2006] BSCA 45 [2013] NSWCA 58 {PAG / 01829667} 2

The Home Building Amendment Act 2011 has removed the ability to run a proportionate liability defence in relation to a claim against a contractor for breach of the Home Building Act 1989 statutory warranties. Who is a "concurrent wrongdoer"? To have its liability apportioned, a defendant must also establish that other parties are "concurrent wrongdoers" as defined by the CLA. A defendant must identify other parties whose acts or omissions caused the loss or damage which is the subject of the claim. This includes concurrent wrongdoers who are insolvent, bankrupt, being wound up, or dead. For another party to be considered a "concurrent wrongdoer" the defendant must establish that the potential wrongdoer: has or had a legal liability to the plaintiff caused the same loss or damage that is the subject of the claim Legal Liability to the Plaintiff An important question is whether a party which is not itself liable to the plaintiff can ever fall within the definition of "concurrent wrongdoer". There is no express requirement in the CLA for a concurrent wrongdoer to be liable to the plaintiff. The court's position appears to be that it is not enough just to establish that other parties also caused or contributed to the plaintiff's loss or damage; the defendant must also prove that the other wrongdoers are legally liable to the plaintiff. This means that the other party owed the plaintiff a duty of care, or alternatively the plaintiff has some other cause of action against the other party by way of contract or statute. This significantly limits the number of parties a defendant can point to as concurrent wrongdoers. For example, in a building claim for pure economic loss, a defendant may have difficulty in establishing that subcontractors owe the plaintiff a duty of care. Same Damage or Loss For the parties to be concurrent wrongdoers, a court must be satisfied that each wrongdoer caused the same loss or damage. This has not always proved easy to do. The High Court recently found, in Hunt & Hunt Lawyers v Mitchell Morgan Nominees Pty Ltd (Hunt & Hunt) [2013] HCA 10, that the inability to recover money under a loan agreement caused by a fraud was the same loss and damage brought about by the negligent drafting of a mortgage document. The lawyers were therefore afforded protection under the proportionate liability regime and were held liable for only 12.5% of the loss suffered. In coming to this conclusion, the High Court discussed some examples of where multiple parties could cause one person to lose the same quantum of damages but not the same damage or loss and would not attract the protection of proportionate liability including: CURWOODS LAWYERS {PAG / 01829667} 3

CURWOODS LAWYERS A hospital sued its architects for negligently issuing certificates of extension to builders. The damage caused by the architects and the builders would not be the same: the loss caused by the builders was the delay in completing building works, while the loss caused by the architects was impairing the hospital's ability to proceed against the builders. A person suffered personal injury due to another's negligent driving then engaged solicitors who failed to institute proceedings in time. The damage would be different: the physical injuries the plaintiff suffered were distinct from the harm to the plaintiff's economic interest in being able to recover compensation for the injuries. This approach will be particularly significant for professions involved in protecting others against risk, such as mortgage drafters, valuers and insurance brokers. For these professions, failing to protect another party against the risk they were meant to be protected against no longer result in a complete liability to one wrongdoer. They will be afforded the protection of proportionate liability. Procedural matters The defendant has the onus of establishing the basis upon which a court should order that the defendant's liability be limited. A defendant must plead the following elements in its defence: The existence of a particular person The occurrence of an act or omission by that particular person A causal connection between that occurrence and the loss that is the subject of the claim 7. Based on Ucak, a defence must be pleaded and particularised in exactly the same way, and with the same degree of precision, as would have happened had the matter been raised by way of cross-claim. 8 The CLA provides that a defendant must notify the plaintiff of concurrent wrongdoers or face cost penalties. The defendant needs to provide the plaintiff with proper notice of the identity of the concurrent wrongdoers and reasons why apportionment should be made. The plaintiff is entitled to know the facts and other matters by which the defendant asserts that its liability should be reduced. Defendants have the advantage under the proportionate liability provisions that they can plead a party is a concurrent wrongdoer without having to join the wrongdoer to the proceedings. This eliminates the need to issue cross-claims and be exposed to possible cost consequences which may follow. 7 8 Hammerschlag J in Ucak v Avante Developments Pty Limited (Ucak) [2007] NSWSC 367. Ucak has been followed in various matters including HSD Co Pty Limited v Masu Financial Management Pty Limited [2008] NSW SC and Perpetual v CTC. {PAG / 01829667} 4

Once a concurrent wrongdoer is identified, it is then up to the plaintiff to join the wrongdoer as a defendant to the proceedings. If a plaintiff wants to recover 100% of its loss, the plaintiff must claim against all possible wrongdoers. Otherwise, a plaintiff will risk having the contribution of non-parties taken into account to reduce the liability of the defendants. The CLA permits a court to grant leave for the joinder of defendants to an action involving an apportionable claim. In NSW, if a party is not joined, a court can make an assessment of their contribution as a non-party. This may leave a plaintiff with a substantial loss. If a plaintiff sues only some of the concurrent wrongdoers and is not satisfied with the judgment, there is nothing to prevent the plaintiff from bringing further proceedings against other concurrent wrongdoers. Any findings in the first proceedings regarding the relative contribution of the parties not joined will not be binding in the later proceedings. This means all issues will need to be re-litigated. A plaintiff cannot recover damages in any further proceedings which would result in it receiving a total sum compensation from all of the proceedings that is greater than the damage or loss sustained 9. Assessment In relation to how apportionment is to be determined, the CLA indicates that a court must make apportionment according to what is "just" in the circumstances. It cannot give judgment for more than that amount. In NSW, the CLA permits apportionment regardless of whether the wrongdoer is a defendant to the proceedings. The courts may consider a range of factors in assessing what is "just" such as: Any contractual obligations, including any express contractual indemnities Any statutory obligations, including those relating to misleading and deceptive conduct Whether a party has profited from the wrongdoing or whether a party is out of pocket The relevant culpabilities of the parties, which involves considering: the degree of the responsibility of the wrongdoers which of the wrongdoers were more actively engaged in causing the loss which of the wrongdoers were more able to prevent the loss liability issues and the degree to which each party has departed from the relevant standard of care. CURWOODS LAWYERS 9 Section 37 of the CLA. {PAG / 01829667} 5

CURWOODS LAWYERS The financial strength and profitability of a party is not to play any part in the assessment. Contractual indemnities and contracting out One continuing issue under the proportionate liability regime has been the question of how contractual indemnities interact with the regime. In a wide range of circumstances, different parties will have contractual indemnities that are invoked once litigation begins; will such indemnities oust the application of the proportionate liability regime? The relevant section of the CLA is not located under the proportionate liability regime; it is s 3A which states: "(2) This Act (except Part 2) does not prevent the parties to a contract from making express provision for their rights, obligations and liabilities under the contract with respect to any matter to which this Act applies and does not limit or otherwise affect the operation of any such express provision. (3) Subsection (2) extends to any provision of this Act even if the provision applies to liability in contract." There has been recent judicial clarification as to the means by which parties may contract out of the proportionate liability provisions under the CLA. The NSW Court of Appeal found that all that was required was contractual indemnity inconsistent with the functioning of the CLA. 10 In order to contract out of the proportionate liability regime, the parties are merely required to allocate liability under the contract between them in a manner inconsistent with the normal operation of the regime. It did not matter that: the contract did not include any specific reference to the proportionate liability regime the contract was of a standard form used in many particular instances the contract was entered into before the proportionate liability regime came into force. One other way in which a contract may seek to oust the proportionate liability regime is by changing the way in which duties under the contract are allocated. As noted above, proportionate liability will only apply in circumstances where there has been a failure to take reasonable care. As such, arguably a contract could set out the duties of the parties so that a breach would not involve any failure to take reasonable care and, thus, ensure that proportionate liability will not apply. An example would be a contractual warranty that one party performs an obligation without any reference to "due care and skill" or "reasonable care" being taken in the performance of it. For example, meeting a construction deadline. 10 Perpetual Trustee Company Limited v CTC Group Pty Limited (No.2) [2013] NSWCA 58. {PAG / 01829667} 6

The different courts have analysed this issue in different ways, and the most recent commentary by the NSW Court of Appeal 11 resulted in the Court splitting three ways, with two opposing views and one Judge abstaining. As such, proportionate liability may still apply in circumstances where the contractual term which was breached was a strict term that did not require a party to use due care and skill. Settlement and proportionate liability It is important to consider the effects that proportionate liability has on the dynamics of negotiating settlement. A key provision to the proportionate liability regime is that the defendant is precluded from claiming contribution against another defendant. Section 36 provides: "A defendant against whom judgment is given under this Part as a concurrent wrongdoer in relation to an apportionable claim: (a) (b) cannot be required to contribute to any damages or contribution recovered from another concurrent wrongdoer in respect of the apportionable claim (whether or not the damages or contribution are recovered in the same proceedings in which judgment is given against the defendant), and cannot be required to indemnify any such wrongdoer." If, however, a plaintiff settles with the defendant, the defendant may become susceptible to contribution claims from other concurrent wrongdoers. When entering into settlement negotiations in which other concurrent wrongdoers are not a party, it is important to remember that s 36 will not necessarily act as a bar to other wrongdoers seeking contribution. Subsequent actions The CLA permits a plaintiff to take further actions against concurrent wrongdoers who are not party to the original proceedings. However, in the new action, a plaintiff is not entitled to recover an amount of damages more than the damage they have suffered. This may involve a re-hearing of the matter and there is no requirement that the court accepts the previous findings. It is possible that, in the subsequent proceedings, the plaintiff will recover less than the total damages suffered if findings are made not to adopt the earlier apportionment. The CLA excludes the joinder of a party who has previously been the subject of a proportionate liability claim that has "concluded". However, as noted above, there is an issue as to whether "concluded" means a judgment that has been determined by a court or can also include consent judgment or dismissal. CURWOODS LAWYERS 11 NSW Court of Appeal. {PAG / 01829667} 7

CURWOODS LAWYERS The model provisions The Standing Committee of Attorney General (SCAG) is presently reviewing the national proportionate liability laws with the aim of achieving greater national consistency. In September 2011, SCAG released a regulation impact statement on proportionate liability which identified the legislative inconsistencies in the proportionate liability provisions in states and territories. Once the model provisions are finalised, the various jurisdictions will amend their current proportionate liability schemes to comply with the provisions. The proposed changes include: Contracting out of proportionate liability is to be prohibited across all jurisdictions, except where the contract is of a specified monetary amount (likely to be either $5 million or $10 million). This is a departure of the New South Wales, Tasmanian and Western Australian legislations The removal of consumer claims and statutory warranties such as those contained in the Sale of Goods Act 1923 (NSW) That the liability of a non-party concurrent wrongdoer may be taken into account, which is currently prohibited in Victoria That the defendant must notify the plaintiff, the other wrongdoer(s), and the court of the identity and location of other possible wrongdoers, as well as the circumstances for believing the person is a concurrent wrongdoer. The penalty for breaching the notification provisions is to be an order of joint and several liability for any award of damages made and the payment of costs thrown away by the failure to comply That the proportionate liability provisions are extended to arbitrations and other forms of dispute resolution. Given the varying interests of stakeholders, it is likely there will be additional recommendations and changes to the model provisions. The SCAG most recently considered the model provisions in October 2013. On this occasion the Attorney General agreed to consider introducing the model provisions, however, there has been no indication as to when. Either way, when the revised legislation is introduced its effect will be significant. Conclusion Based on the proportionate liability provisions, a defendant can no longer be held responsible for 100% of the plaintiff's loss in circumstances where a court finds concurrent wrongdoers have, to some degree, contributed to the loss or damage suffered by the plaintiff. {PAG / 01829667} 8

Recent decisions have created greater clarity regarding the operation of the regime; however, there are circumstances where it will be difficult to assess whether another party is a concurrent wrongdoer. The benefit of proportionate liability will be diminished unless a defendant identifies any concurrent wrongdoers and pleads with some precision the basis for any reduction. The proportionate liability regime only applies to property damage and financial loss claims with some exceptions. For a party to be a "concurrent wrongdoer", it must owe the plaintiff a duty of care. The wrongdoing can either be concurrent or successive, provided that the wrongdoing has caused the same loss or damage. Parties are entitled to contract out of the proportionate liability regime. The courts have provided some leniency in allowing a party to contract out of proportionate liability where there are clear clauses allocating liability. The courts will also consider proportionate liability in many contract claims, even when it is questionable whether the claim arose out of a failure to take reasonable care. As such, contract terms setting out the obligations under a contract may not be sufficient to oust the proportionate liability regime. CURWOODS LAWYERS {PAG / 01829667} 9