CONTRACTS PROPORTIONATE LIABILITY IN THE BUILDING AND CONSTRUCTION INDUSTRY FOLLOWING HUNT & HUNT V MITCHELL MORGAN

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1 CONTRACTS PROPORTIONATE LIABILITY IN THE BUILDING AND CONSTRUCTION INDUSTRY FOLLOWING HUNT & HUNT V MITCHELL MORGAN Jaclyn Smith, Lawyer Corrs Chambers Westgarth, Melbourne INTRODUCTION Proportionate liability, as it is utilised across Australian jurisdictions, remains an inconsistent, 1 thus ineffective, means of allocating risk despite the ambitious policy attempt to make damages awarded against multiple defendants more equitable. Despite the practical issues with the application of the regime, the focus on apportionment of loss between concurrent wrongdoers is sound and now entrenched in the Australian legal framework.2 This article will examine the development of the proportionate liability regime focussing on how it applies to the building and construction industry, particularly in light of the recent High Court of Australia decision in Hunt & Hunt v Mitchell Morgan Nominees Pty Ltd (Hunt & Hunt v Mitchell Morgan). 3 It is highly relevant to discuss the regime as it applies specifically to this industry given that it was within that context that the regime was first introduced in Australia. 4 While these industry specific regimes have been abrogated following the introduction of the general proportionality liability regime, their initial existence symbolises the significant impact that issues surrounding apportionment and concurrent wrongdoers have on the Australian building and construction industry. Within the building and construction industry there is a high degree of emphasis on the pre allocation of risk either contractually, through tort law or through insurance. Proportionate liability is a relatively unknown variable entirely dependent upon an act or omission, that causes a party loss, occurring. It is a risk that is unable to be allocated under a contract beyond the general allocations already in place, particularly in regard to the quantum of damage that each party could be liable for in the event of a dispute. It also has the potential to cut across carefully negotiated allocation of risk. 5 Unless it is contracted out of, proportionate liability replaces the contractual risk allocation as arrived at between the parties in their contract to the extent that the two are inconsistent. If the regime is contracted out of, there can be gaps exposed in the parties insurance cover, and while this is an area heavily commented upon it will not be discussed in this article. 6 Aside from the direct impact that the regime has on the contractual risk allocation, the policy behind the regime makes a legitimate attempt to make dispute resolution a more fair and equitable process. The effect of the regime, however, is not intended to do more by way of apportionment than in theory could previously be achieved by contribution under joint and several liability. 7 The recent High Court decision in Hunt & Hunt v Mitchell Morgan has confirmed the role that the statutory proportionate liability regime has in disputes with multiple parties causing the loss claimed. 8 It is the first judgment handed down by the High Court that involves a detailed analysis of the proportionate liability regime, the New South Wales legislation in particular. 9 The decision clarifies the meaning of damage or loss that is the subject of the claim in the legislation and further use of damage in the legislative provisions. The uncertainty surrounding the expression of damage or loss has been a source of considerable speculation since the introduction of the regime across the Australian jurisdictions, and while the Hunt & Hunt v Mitchell Morgan decision adds to the definition there is still room for further clarification AUSTRALIAN CONSTRUCTION LAW NEWSLETTER #152 SEPTEMBER/OCTOBER 2013

2 This article will work through the case history of this particular dispute as a means of demonstrating the development that the law has taken on this point in particular. It will also look at the impact of the decision on the building and construction industry and attempt to anticipate its impact on contractual risk allocation. The discussion will focus on the application of the regime in the court hierarchy, and will not touch on its role in arbitral proceedings as it is now relatively settled that the regime will not apply in such instances. 11 This article will also examine the current status of the proportionate liability regime in Australia by conducting a comparative analysis of its application across several jurisdictions with a particular emphasis on the utility, or otherwise, of the contracting out provisions. It will look at the second draft model provisions drafted by the Standing Committee of Attorney s General (SCAG) 12 and comment on the effectiveness of the proposed reforms, particularly in regard to contracting out. Following the discussion on Australia s own law reform surrounding proportionate liability, this article will look at the current reforms under consideration in New Zealand. While New Zealand still uses joint and several liability, their Law Commission is proposing to move to a proportionate liability regime, specifically mentioning the Australian model as an example of how it can be applied in practice. This comparison is still a live topic because Australia too is still in the process of reforming, and hopefully nationally unifying, its proportionate liability regime. PROPORTIONATE LIABILITY IN AUSTRALIA BRIEF BACKGROUND TO THE REGIME Each State and Territory enacted proportionate liability legislation, which is similar but not uniform, 13 between 2004 and 2005 in response to a crisis in the insurance industry in the early 2000s. 14 The crisis was typified by a growing number of actions against professionals, particularly auditors, who were being singled out as targets for negligence actions not because of their culpability (which might be small) but because they were insured and had the capacity to pay large damages awards. One consequence was a sharp risk in insurance premiums payable by professionals. 15 The legislation was enacted upon the recommendation of the Davis Report 16 and in the draft form prepared by the SCAG in July 1996, 17 which principally sought the abolition of joint and several liability in Australia for all economic loss. 18 Since that time, a second draft of model provisions has been released for consultation and these are currently under consideration by SCAG. 19 The legislation applies to claims for property damage or economic loss from a failure to take reasonable care, and also in relation to misleading and deceptive conduct.20 The regime seeks to limit a Court s award of damages in such claims to amounts that solely reflect the tortfeasor s responsibility. Under joint and several liability, a defendant could be liable for an entire judgment made against all defendants that contributed to a loss, despite personally only having a nominal percentage of the responsibility. 21 ELEMENTS OF PROPORTIONATE LIABILITY At a legislative level, there are two essential elements to the regime that are shared across all Australian jurisdictions. To enliven the regime there first needs to be an apportionable claim. This is a claim for either economic loss or property damage under tort, contract or statute, arising from a failure to take reasonable care. 22 Secondly, there needs to be concurrent wrongdoers, namely two or more parties whose acts or omissions have contributed to the loss in dispute. 23 It is this second element that has caused the most confusion since the introduction of the proportionate liability regime, and is the area that this article will focus on. Various cases across the jurisdictions have grappled with multiple tortfeasors and what damage or loss they are required to have contributed to in order to become concurrent wrongdoers, most notably for discussion in this article is that in Hunt & Hunt v Mitchell Morgan. One of the initial hurdles that must be established by a plaintiff is that the tortfeasor is legally liable to them for the relevant damage or loss. 24 The legal uncertainty created by the wording of the legislative provisions was clarified by Besanko J of the Federal Court in Shrimp v Landmark Operations Ltd. 25 His Honour held that caused in the definition of concurrent wrongdoer should be read as meaning such as to give rise to a liability in the concurrent wrongdoer to the plaintiff. 26 The effect of this jurisprudence is that to be a concurrent wrongdoer the tortfeasor must have caused the loss or damage that is the subject of the plaintiff s claim and be liable to the plaintiff for that loss or damage. 27 AUSTRALIAN CONSTRUCTION LAW NEWSLETTER #152 SEPTEMBER/OCTOBER

3 In the context of the building and construction industry this becomes most relevant when parties look to use deeds of warranty or tripartite agreements, or on a more immediate level, when parties are considering which contract model to use for their project. While such warranties and agreements would provide the contractual nexus for subcontractors to be liable to a principal, 28 they have also been noted to erode the single point responsibility the principal intended to create by entering into the head contract. 29 This is demonstrated in the example of a consultant designing a building for a contractor who has a design and construct arrangement with the principal, and the consultant having to sign a warranty as to the design of a building in favour of the principal. 30 Years after completion, the building collapses and the principal sues the contractor, who in turn joins the consultant as a co defendant. 31 By virtue of the warranty agreement the consultant is 100 per cent liable for the principal s loss, without such an agreement the proportionate liability regime would be likely to apportion the loss caused between the contractor and the consultant. 32 The warranty bypasses the responsibility of the contractor under the head contract and provides a mechanism for the principal to directly bring action against the consultant without needing to utilise the head contract. 33 The situation could be further complicated if the consultant is insolvent by the time the building collapses, transferring the risk of being able to recover from the consultant to the principal and allowing the contractor to avoid any contribution obligations. 34 Instead of utilising a design and construct model to ensure the principal has single line accountability, it places it in a similar risk category as a construction management model. 35 The advantage of a design and construct model, from a defendants perspective, is the potential for loss to be apportioned between subcontractors and head contractors, despite this not being the intention of the model. 36 As the example above demonstrates, proportionate liability may attempt to be more equitable in how it apportions liability, but its application introduces new complexities into the already complex arrangement of a construction project. Given the ambiguity that this has caused, it is unsurprising that this has been identified as one of the key areas for reform. 37 CONTRACTING OUT The lack of national uniformity means that proportionate liability is inconsistently 38 used or commonly contracted out of in jurisdictions that expressly permit it, those being New South Wales, Tasmania and Western Australia. Contracting out essentially means that parties to a contract can expressly choose to opt out of the proportionate liability regime and instead revert to the joint and several liability approach in the instance that that multiple tortfeasors cause the plaintiff s loss. This encourages forum shopping at the time of entering into a contract, which enables parties to choose a jurisdiction for their contract that allows for contracting out of the regime. 39 For example, if a project is constructed in Victoria, the contractor is from Victoria also but the owner is from NSW, the parties could legitimately agree to choose NSW as the jurisdiction of their contract. On the other hand, if all parties and the project were based in Victoria, there would be no legitimate reason to choose NSW as the jurisdiction of the contract. NSW is used in this example as it is one of the few jurisdictions that allow contracting out, and this is commonly done for construction projects that have a connection to that jurisdiction. Contracting out has also been noted as an attempt to avoid a multiplicity of claims arising when something goes wrong. 40 In Tasmania, there is no need to make specific reference to the legislation in order to exclude the regime from applying to the contract. 41 All that is necessary is a contractual allocation of liability that is worded in a manner inconsistent with the regime. 42 Practical suggestions as to how to draft a contracting out clause have been articulated by Owen Hayford in his carefully considered analysis of the regime s impact on contractual risk allocation. 43 Hayford s draft clause both articulates that the regime is excluded from applying to the contract as a whole, and also that it cannot be relied upon by the parties. 44 Interestingly, Hayford s clause also provides that the contractor indemnify the principal against any loss or damage that is not recoverable in the event that the contracting out is unsuccessful and the regime applies to the contract. 45 While this is effectively ensuring that even if the contracting out is unsuccessful the effect of it still applies to the contract, it also removes the benefits of the regime from the contractors reach. One way to negate the contracting out provision in those jurisdictions that allow is to have it set aside on the grounds that it is contrary to public policy. 46 An example of when this setting aside can occur is where a project and parties are all located in Queensland yet the law of another jurisdiction is chosen to govern the contract purely to avoid the application of the Queensland law AUSTRALIAN CONSTRUCTION LAW NEWSLETTER #152 SEPTEMBER/OCTOBER 2013

4 SUGGESTED REFORM ON CONTRACTING OUT Several suggestions have come forward, namely from the SCAG, to reform the proportionate liability regime in a way that ensures a more nationally consistent approach is applied. These reforms have focussed on contracting out, and either allowing 48 or disallowing 49 it universally, or coming to a compromise where it is only allowed to apply to certain types of contracts. 50 Universally allowed v universally not allowed The first reform proposed by the SCAG is that the legislation be uniformly amended to expressly allow for contracting out across the jurisdictions. 51 The second option is the polar opposite of this, to universally and expressly disallow contracting out of the regime. 52 It seems contrary to the policy behind the regime to allow parties to contract out of it, and the SCAG have noted that contracting out subverts the purposes of the legislation. 53 In an all or nothing reform, if it were simply disallowed in all jurisdictions, a vast portion of issues surrounding forum shopping could be eliminated. Similarities can be drawn within the building and construction industry to the way that the security of payment provisions work and their applicability, albeit in forms not yet uniform, across jurisdictions. The impetus behind the security of payment reforms was that they were essential to the commercial operation of the building construction industry, and so the various State and Territory Acts have been enacted without allowing for the statutory regime to be contracted out of. 54 The suggested reforms to the disallowance of contracting out of proportionate liability reflect a similar sense that, unless uniformly applied, their purpose will be ineffective for contracting parties. Within the context of the building and construction industry, contractors in particular would welcome the prohibition of contracting out as a way to ensure that they are not liable for downstream risk associated with subcontractors and are able to benefit under the regime. Contracting out only allowed for contracts in excess of $5 10 million The third option for reform proposed by the SCAG would see contracting out prohibited except for agreements in excess of an applicable threshold value, such as $5 10 million. 55 The quantum suggested reflects the value that large infrastructure contracts typically exceed, those beyond that value being the type of projects necessitating contractual risk allocation. 56 The danger with attaching a monetary qualifier on the ability to enliven contracting out in any given contract is that the value of the contract might not always be clear, thus creating uncertainty as to whether contracting out can be applied. 57 On a more positive note, for projects under this threshold value parties will not feel the commercial pressures to relinquish the protection offered by the proportionate liability provisions. 58 Contracting out only for non professionals or the provision of non professional services An option proffered by Tony Horan, in his report reviewing the proportionate liability regime, is that contracting out be allowed in all jurisdictions and only not permitted for contracts dealing with professionals or the provision of professional services. 59 While this does not go as far as the first two all or nothing options put forward by the SCAG in terms of eliminating any chance of inconsistencies in contracts, it would mean that contracts formed within the building and construction context, as they deal predominantly with professionals or the provision of professional services, would not be able to be contracted out of. This suggested reform is in line with the policy behind proportionate liability, and supports the concept that professionals are intended beneficiaries of the regime via reduced insurance premiums. 60 While this reform is likely to be welcomed by parties operating in the building and construction industry, in so far as contracts for professionals and professional services are concerned, it would not resolve issues beyond the industry with the inconsistent application of contracting out. There are no foreseeable problems with the application of this reform because the experience in the building and construction industry is fairly established when it comes to identifying when a person qualifies as a professional. 61 There is also an express standard of care for professionals defined in the legislation itself. 62 The policy behind this reform option is much the same as the SCAG s third option involving a value threshold, in that contracts involving professionals or for professional services are likely to require contractual risk allocation. This option also removes the pressure from a non professional party to a contract, such as in a domestic building contract where a home owner directly contracts with a contractor, to contract out when they may not understand the implications of doing so. IMPLICATIONS OF THE REGIME IN PRACTICE The proportionate liability regime, despite commencing over a decade ago, is still observed to be wreaking havoc in the allocation and management of AUSTRALIAN CONSTRUCTION LAW NEWSLETTER #152 SEPTEMBER/OCTOBER

5 risk, particularly on construction projects. 63 While the concept of the regime commenced from a sensible starting proposition it is the poor execution of the legislation that has been most critiqued. 64 There have been several cases brought before courts, across the jurisdictions that have challenged the practical application of the regime. Case law dealing with the intricacies of the regime has provided much needed guidance over the years since its inception. 65 The reliance on clarification by the common law illustrates the complex legal framework that the statutory regime creates. While there are some general observations that can be made about the application of the regime and its particular impact on the building and construction industry, there are also specific issues including quantum of damages and the ability to recover an award of damages that warrant due consideration. REQUIREMENT FOR JUDICIAL DETERMINATION One of the practical implications of the regime is that the parties in dispute will require a judicial determination to allocate the proportion of loss they are liable for, unless they have either contracted out of the regime or have allocated for apportionment in their contract. Where there is only one wrongdoer, the contract is likely to have expressly accounted for where a particular area of risk will fall. For example, under a design and construct contract it is the contractor who bears design risk. 66 In a situation where there are concurrent wrongdoers, such as the contractor and a subcontractor, because the owner is not in a direct contractual relationship with a subcontractor the proportionate liability regime provides a mechanism for the owner to be able to recover from the subcontractor in the event that loss is caused where that subcontractor owed the principal a legal liability. CONCURRENT WRONGDOERS MUST BE LIABLE TO THE PLAINTIFF This discussion highlights a category that was in desperate need of clarification, that being whether or not a plaintiff could bring action under the regime against a tortfeasor who owed them no legal liability. The judgment of Besanko J in Shrimp v Landmark Operations Ltd 67 clarifies this position and subsequent decisions have cemented this jurisprudence. 68 Under the Commonwealth, Queensland, New South Wales and Victoria statutory regimes, to be a concurrent wrongdoer defendants are required to have a independent legal liability to the plaintiff. 69 This means that unless a particular duty is owed by a party in contract, tort or under the misleading and deceptive conduct provisions, they cannot be held to be a concurrent wrongdoer. In the construction context, this means that principals cannot join a subcontractor as a concurrent wrongdoer in an action unless the subcontractor has provided an additional warranty, is contractually bound, has a duty to prevent pure economic loss, or has a duty under misleading and deceptive conduct law. Proportionate liability does not circumvent the existing requirements surrounding privity of contract and does not interfere with the existing law to provide additional avenues of recovery where they did not exist under joint and several liability. A practical example of this, and one where it is the contractor who is the plaintiff, is where a contactor brings action against a principal for the provision of inaccurate tender information prepared by an architect or engineer. 70 The principal will only be able to apportion its loss to that architect or engineer where it can demonstrate that the architect or engineer had an independent and direct liability to the contractor. 71 In the absence of a contract or direct warranty between the contractor and the architect or engineer, the only duty that the architect or engineer can owe to the contractor would lie in a duty to prevent pure economic loss or under the misleading and deceptive conduct provisions. 72 RISKS OF RECOVERY PASSED TO PLAINTIFF One of the key points of different between the use of joint and several liability and the proportionate liability regimes is the shifting of risk of a defendant being unable to pay because of insolvency, bankruptcy or untraceability is moved from the co defendants to the plaintiff. 73 The plaintiff and defendant role will not always be allocated to principal and contractor respectively, but there is opinion in the industry that principals are more likely to be plaintiffs in claims between it and a contractor arising out of the contractor s failure to take reasonable care when under a duty to do so. 74 It is this assumption that supports the view that principals are largely going to be in favour of contracting out, and for contactors to welcome the application of the regime. 75 In situations where one co defendant fits into one of those categories, it is no more fair or reasonable to place that risk on the plaintiff than it is to place it on the other co defendants. Industry opinion has suggested considerations of prejudice to plaintiffs weigh less strongly than the value of limiting the liability of defendants according to their share of responsibility AUSTRALIAN CONSTRUCTION LAW NEWSLETTER #152 SEPTEMBER/OCTOBER 2013

6 The only advantage shifting this risk to the plaintiff is that recovery is at least attempted to be made from all defendants, not just those with the financial ability to pay if an award of damages is made against them. It also acts as an incentive for plaintiffs to bring their action against all potential defendants in the one proceeding. The ability of a plaintiff to recover an award of damages made in their favour may also be affected in the way that they bring their action initially. Depending on which jurisdiction they are in might impact who they do, and do not, bring their action against. This is a particularly important consideration because one of the key points of difference across the jurisdictions is the approach taken by the courts to wrongdoers that are not a party to the proceedings. While the Commonwealth, New South Wales, Queensland, Northern Territory and Australian Capital Territory all allow their courts discretion in whether to have regard to the liability of non party wrongdoers, Victorian courts are expressly prohibited from having regard to the liability of non parties with the exception of parties that are dead or insolvent. 77 Western Australia, South Australia and Tasmania are at the other end of the spectrum again and mandate that regard must be had to liability of non party wrongdoers. 78 These significant jurisdictional differences can have major repercussions, particularly for defendants who are seeking to apportion loss amongst other wrongdoers. It places an onus on them to join other wrongdoers to the action against them so that they can actually benefit from the proportionate liability regime and do not end up shouldering 100 per cent of an award of damages if one is made against them. ABILITY TO RECOVER AN AWARD One benefit of the proportionate liability regime for head contractors, insurers and other parties with deep pockets is that they no longer bear the entire liability for loss caused to a principal in instances where multiple parties have failed to exercise reasonable care. Subcontractors are now also exposed to liability where they have been a concurrent wrongdoer causing the loss suffered by the principal, though only in situations where they have owed a duty of care to the plaintiff. 79 As such, the principal, not the head contractor, can now carry the risk that this subcontractor may be unable to pay its proportion of the principal s loss. 80 In theory, this is beneficial because it means that each party will only be responsible for the loss that it had a share in causing, and they will not be burdened with carrying risk that is in disproportion to their actual role in the act or omission causing the loss. From a commercial perspective this may encourage parties, both principals and contractors, to enter into projects and utilise guarantees and tripartite agreements to ensure that avenues for recovery are not limited to those available under the head contract. From a project finance perspective, the balance sheet of large contractors will no longer be exposed as the sole source of recovery when multiple parties on a project contribute to the same loss or damage, so such contractors may be more likely to demand such warranties and tripartite agreements described above. The practical implications of the regime tell a different story, particularly for principals who are now precluded from recovering the entirety of their loss from just one of the concurrent wrongdoers. Proportionate liability is a relatively unknown variable entirely dependent upon an act or omission, that causes a party loss, occurring... Unless it is contracted out of, proportionate liability replaces the contractual risk allocation as arrived at between the parties in their contract to the extent that the two are inconsistent. AUSTRALIAN CONSTRUCTION LAW NEWSLETTER #152 SEPTEMBER/OCTOBER

7 Where one of the concurrent wrongdoers is insolvent, bankrupt or unable to be located, this means that a plaintiff is not able to recover their proportion of the loss and can only pursue the other concurrent wrongdoers for their respective proportion of the loss cause. While this is in line with the policy behind the regime 81 it does not necessarily promote principals entering into project agreements with contractors that they have not had a commercial relationship with already, for fear of not being able to recover in the event of a dispute. It also reduces the appetite of project financiers from lending to projects and reduces activity as a result of this. Commercial relationships draw on more than just the balance sheets of the contracting parties, and the risk of non performance or non payment on a project is already high enough without considering the risks associated with contracting with an unknown entity. UNKNOWN QUANTUM OF DAMAGES One of the major highlights of the regime from a defendant s perspective is that it can reasonably anticipate that the quantum of damages, if such an award is made against it, will be limited to its contribution to the loss or damage suffered by the plaintiff. By the same token, one major downside of the regime is that the risk allocation between the parties is not known until the actual act or omission in question causes a plaintiff s loss. Unless the parties have dealt with apportionment in their contract, the actual quantum of a party s liability is not realised until a court judgment is made. As there are infinite combinations of causality and degrees of risk that could take place on any given construction project, the proportion that any given party to a project will be liable for cannot genuinely be allocated for at the time that a project commences. In the same sense, the doctrine of privity of contract limits the scope of who can be accounted for in the initial contractual risk allocation. For example, a head contract would be unable to allocate the risk that would be associated with specific contractors used in a subcontractual relationship, aside from allocating the entire risk to the contractor under a design and construct arrangement. Unlike other categories of risk in construction projects that can be traditionally allocated to the party best able to manage it, proportionate liability represents an unknown quantum and contractually unallocatable category for parties to a project and has been described as the death of certainty for contractual risk allocation. 82 MEASURING UP TO EXPECTATIONS? While the proportionate liability regime was intended to rectify serious issues concerning insurance, particularly professional indemnity insurance, it is questionable whether the practical effect of the legislation achieves this lofty ambition. As has been identified throughout this article in the discussions surrounding contracting out, the biggest hurdle to the regime achieving its intended purpose is the lack of uniformity across jurisdictions. The inconsistencies as to contracting out cause particular problems, namely in the exposure to risk that it can create. In the building and construction industry this is best demonstrated on projects across different jurisdictions and with parties from different jurisdictions. Where contracting out is allowed, parties may be exposed to a gap in what their policy covers and what they agree to pay out in the event of an apportionment claim. This is because insurance policies typically do not provide cover for any liability accepted over and above that which is provided for by the proportionate liability legislation. 83 Insurance policies typically state that liability is limited to that which would be available absent a contract. In the context of negligence a contract which limits the operation of the regime, through contracting out, changes the liability profile which would have been available absent a contract. JUDICIAL CLARIFICATION OF DAMAGE OR LOSS While there are several aspects of the legislative provisions that have caused disputes across the jurisdictions, the recurring one of most significance recently is the phrasing of the damage or loss that is the subject of the claim. 84 Recent Court of Appeal decisions in Victoria and NSW have adopted a narrow interpretation of the expression, equating it with the same damage provision enabling parties to seek contribution from other parties. 85 While the Hunt & Hunt v Mitchell Morgan decision of the High Court dealt expressly with the New South Wales jurisprudence, the decision in St George Bank v Quinerts Pty Ltd (Quinerts) 86 was the last word on proportionate liability in Victoria prior to the recent High Court ruling. ST GEORGE BANK V QUINERTS PTY LTD 87 The case concerned a unit that had been overvalued by the valuer (Quinerts), and on the basis of that valuation the bank (St George) had loaned a sum of money to the buyer of the unit (the borrower) in excess of what the unit was actually valued at. 88 The bank sued the valuer alleging that it would never have loaned the money to the buyer if the unit had been correctly valued. 89 While the valuer s negligence was accepted, the focus of the dispute centred on the definition of the 36 AUSTRALIAN CONSTRUCTION LAW NEWSLETTER #152 SEPTEMBER/OCTOBER 2013

8 loss or damage that the bank had suffered. The bank argued it was the entire amount that it loaned the buyer, and the valuer argued that it was the amount actually loaned minus the amount that the bank would have been prepared to loan the buyer if the valuation had been accurate. 90 The trial judge found in favour of the valuer s argument, but refused to apportion loss between the valuer and the borrower on the grounds that they caused different losses to the bank. 91 The relevant aspect of the judgment in this case, for the purposes of proportionate liability, pertained to the valuer s unsuccessful cross appeal for liability to be apportioned. 92 As has been mentioned earlier in this article, Nettle JA held that the regime was not intended to do more by way of apportionment than in theory could previously be achieved by contribution. 93 To be successful under contribution the loss or damage caused by both tortfeasors must have been the same damage as the loss or damage that is the subject of the [plaintiff s] claim. 94 His Honour arrived at this decision following an interpretation of the terms based on their plain and ordinary meaning, 95 based on judicial opinion in previous cases, 96 and agreed that the legislative context did not justify an expansive interpretation of the same damage. 97 The loss the borrower caused was their failure to repay the money under the loan, and the valuer s damage was causing the bank to accept inadequate security from which to recover the amount of the loan, so were clearly not the same damage as required under his Honour s interpretation of the legislation. 98 The requirement that the loss or damage the subject of the claim be the same damage as required under contribution is what limits the scope of this judgment to be of assistance to subsequent defendants. WOODS V DE GABRIELE 99 While this case pre dated the appeal decision in Quinerts, it is useful to note the outcome of the dispute as it is one of the few decisions from the State jurisdiction to actually expand upon the interpretation of proportionate liability. Quinerts may have restrained the scope available to defendants to benefit from the statutory regime, 100 but this decision raised the possibility of proportionate liability applying to all claims under services contracts due to the implied term in those contracts that services will be performed with reasonable care and skill. 101 This clarified some of the considerable uncertainty that surrounded the impact proportionate liability would have on risk allocation under professional services contracts. 102 It also supports the substance of a claim being more powerful than its form, and the notion that the type of claim or the manner in which it is pleaded will not prevent the Victorian proportionate liability applying to a particular situation. 103 HUNT & HUNT V MITCHELL MORGAN Counsel for Hunt & Hunt described the decision of the High Court as one that breathes life back into laws that were severely constrained after the Courts of Appeal in Victoria and New South Wales had limited the practical operation of those laws. 104 Following the discussion above regarding the Quinerts decision, it is understandable why defendants across all jurisdictions would share this view. Despite these advances in interpretation of the legislation, Hunt & Hunt v Mitchell Morgan takes the clarification a much needed step further, allowing greater scope for defendants to benefit from the regime. 105 This case, and others that expand on the practical application of proportionate liability, are necessary to clarify the sufficiently unsettled questions of law that are raised by the statutory provisions across the Acts, such as those surrounding the onus of proof in proportionate liability claims. 106 The majority decision is so important because the Court of Appeal decision was effectively undermining the policy behind the proportionate liability reforms. It was placing professional service providers solely in the firing line again in circumstances where other wrongdoers lacked financial resources. 107 In some respects it was a decision that the regime needed in order to move forward in its jurisprudential development. THE FACTUAL AND CASE HISTORY The dispute concerned funds that had been transferred to Mr Caradonna, with the assistance of his solicitor Mr Flammia (collectively, the fraudsters ), on the security of a mortgage provided to him and his business associate, Mr Vella, by Mitchell Morgan. 108 Caradonna had forged Vella s signature on the mortgage documents, and Flammia had dishonestly certified them, to acquire the mortgage. 109 The debt owed to Mitchell Morgan was secured by these mortgage documents and a loan agreement that had been drawn up by Mitchell Morgan s solicitors, Hunt & Hunt. 110 By the time proceedings were initiated, both fraudsters were bankrupt so action was brought against Mr Vella by Mitchell Morgan in the New South Wales Supreme Court. Due to the forged nature of the documents, Mr Vella was not liable for Mitchell Morgan s loss. Hunt & Hunt were also joined in that proceeding for their breach of their duty of care to Mitchell Morgan. 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9 They were found to be negligent for not drafting a mortgage that could obtain the benefit of indefeasibility despite being procured by fraud. 111 The crux of the appeal process was debating the quantum of the loss or damage that Mitchell Morgan suffered that could be apportioned, if at all, to Hunt & Hunt. It is worth examining the case history to gain insight into the full circle that the decisions travelled in, and the potentially drastic outcomes for the regime more broadly if the Court of Appeal decision had been the final word in the dispute. The judgments at all three stages of the process display a tendency to deliberate the true meaning of damage or loss in its legislative context, the majority judgment in the High Court drawing much of its logic from the trial judgment of Young CJ. TRIAL JUDGMENT Hunt & Hunt argued that the fraudsters were concurrent wrongdoers within the meaning of the proportionate liability regime, and that their own liability should be limited to a proportion of the loss that reflects their responsibility for Mitchell Morgan s damage. 112 In assessing Hunt & Hunt s claim for apportionment, his Honour highlighted that professional advisers such as solicitors are neither insurers 113 nor superhuman in their abilities 114 and are not obliged to warn commercially sophisticated clients of risks which a reasonable person would assume that client was aware of, such as the risk of fraud in these circumstances. 115 Failing to draft a mortgage that adequately dealt with the risk of fraud was quite another matter. 116 Young CJ also undertook an analysis of the steps that Hunt & Hunt and Flammia would have needed to have undertaken to avoid the risk of harm, such as making enquiries about the authenticity of the mortgage documents or using a particular form, and concluded that this burden was not very great. 117 His Honour found that Mitchell Morgan s claim against Hunt & Hunt was an apportionable one, 118 and Hunt & Hunt s liability was limited to 12.5 per cent of Mitchell Morgan s loss. 119 Interestingly, Young CJ did not articulate what exactly the loss was that Hunt & Hunt and the fraudsters caused. His Honour continues his analysis of apportionment by looking at how the fraudster, Flammia, caused Hunt & Hunt s loss, that loss being defined as the 12.5 per cent that they have to contribute to Mitchell Morgan s loss. 120 This application of the regime tends towards an approach for contribution that would have existed under joint and several liability, less an apportionment of the same loss or damage that Mitchell Morgan were claiming. Aside from such discussions the actual explanation that his Honour provided was criticised in the Court of Appeal as being not very revealing. 121 The mentions made by his Honour of the damages claimed by Mitchell Morgan against Hunt & Hunt are for the financial value of the forged mortgage plus interest. 122 This is picked up in the majority judgment of the High Court and could partly explain their emphasis on the difference between loss or damage and damages made by way of an award, though this will be discussed later in this article. This judgment is particularly critical to an analysis of the High Court s decision as it was cited by the majority judgment as finding, without a doubt, that Hunt & Hunt was a wrongdoer whose actions were a cause of Mitchell Morgan s inability to recover the monies it advanced. 123 NEW SOUTH WALES COURT OF APPEAL The basis for Mitchell Morgan s appeal to the New South Wales Court of Appeal was that Hunt & Hunt were not concurrent wrongdoers with the fraudsters and therefore they should not have had their liability limited. 124 Their successful appeal turned on the judicial interpretation of the wording in the legislation of the same loss or damage, and the loss caused by Hunt & Hunt was held to have been caused without any part played by the fraudsters. 125 Giles JA based his analysis on the fact that Mitchell Morgan s relevant loss for the purpose of the legislative provision the damage or loss that is the subject of the claim, was economic loss. 126 Although, as the majority judgment in the High Court points out, this merely draws points to the immediate effects of the fraudsters conduct and of the negligence of Hunt & Hunt, 127 not the actual loss that Mitchell Morgan suffered. This identification of the loss or damage as Mitchell Morgan s paying out of money that they would not otherwise have had to 128 should not have been equated with the actual loss or damage itself. 129 That this definition is not clarified until much later in the judgment, when Giles JA raises the distinction, is surprising. 130 His Honour does conclude by stating the relevant economic loss suffered by Mitchell Morgan to be not having the benefit of security over the property that was the subject of their mortgage. 131 Due to the acts or omissions of the fraudsters not being a cause of this loss, his Honour held that they were not concurrent wrongdoers and thus Hunt & Hunt were liable for the entirety of that loss. 132 Following the discussion in Quinerts it is evident that this case was determined under the same 38 AUSTRALIAN CONSTRUCTION LAW NEWSLETTER #152 SEPTEMBER/OCTOBER 2013

10 interpretation of the authorities. Their Honours of the High Court majority judgment looked at the practical implications of Giles JA finding Mitchell Morgan to have incurred a loss simply by virtue of entering into their negligently drawn mortgage, and found that at that point no loss had actually occurred. 133 Their Honours held that the more correct interpretation of the legislation, and the one that correctly measures when Mitchell Morgan s damage began to accrue, was to consider Mitchell Morgan s economic loss and damage as commencing when the money became unrecoverable. 134 The policy rationale behind this is that it would be unjust to compel a plaintiff to commence proceedings before the existence of his or her loss is ascertainable. 135 HIGH COURT OF AUSTRALIA MAJORITY JUDGMENT The key issue in Hunt & Hunt s appeal to the High Court, as identified in the joint majority judgment, was the proper identification of the loss or damage that Mitchell Morgan claimed against Hunt & Hunt 136 and whether there was another party whose acts or omissions caused that loss or damage. 137 After being found to be liable for 100 per cent of the damage or loss by the Court of Appeal, Hunt & Hunt sought relief from the High Court in terms of an apportionment of this loss or damage. It was already established, and not disputed, that Mitchell Morgan s claim against Hunt & Hunt was an apportionable one for the purposes of the statutory regime. 138 As previously mentioned, their Honours placed particular emphasis on the importance of correctly identifying loss or damage, damage being the injury and other foreseeable consequences suffered by a plaintiff that are fundamentally different to damages which are claimed by way of compensation. 139 This emphasis was particularly necessary given that Mitchell Morgan did not expressly state what loss or damage it was that they were claiming, and also because Hunt & Hunt alleged that it had been incorrectly classified by the Court of Appeal. 140 Mitchell Morgan only stated that their loss and damage was continuing and included the sum they advanced and other expenses. 141 It is from this that their Honours inferred Mitchell Morgan s claim to be for the inability to recover the monies it had advanced. 142 On this basis, while the claims against the three named concurrent wrongdoers were based on different causes of action, they each were founded on Mitchell Morgan s inability to recover the monies it advanced and the acts or omissions of all of them materially contributed to Mitchell Morgan s inability to recover that amount. 143 This is a much broader interpretation of the legislation, and applies a causative approach rather than limiting a defendant s recovery to that which would have been available under contribution. The line of authorities cited by their Honours reflected that under causation it was enough that a defendants conduct be one of the causes that caused the loss or damage suffered by the plaintiff. 144 With this loss defined as Mitchell Morgan s inability to recover monies, the relevant test to be applied to both Hunt & Hunt and the fraudsters was whether their conduct or omissions materially contributed to that loss. 145 Even if the loss or damage had been defined in the same way in the Court of Appeal, the approach taken there was so narrow that both parties would have only been found to be concurrent wrongdoers if their acts or omissions were the same. Given the complexities of commercial arrangements, particularly in situations similar to those in this instance, it is highly unlikely that any two parties would be able to be concurrent wrongdoers under such a strict application of the law. DISSENTING MINORITY JUDGMENT Bell and Gageler JJ, in a joint dissenting judgment, upheld the approach to defining the phrase damage or loss as used by the Court of Appeal. In their view, the relevant loss or damage that Hunt & Hunt caused was the lack of a security for the loan. 146 While their Honours drew the same distinction between damage or loss that is the subject of the claim, and damages that form an award of compensation, 147 the judgment differs in regard to the definition of the act or omission that caused the respective loss or damage that is the subject of the claim. 148 While the majority judgment favoured a broad causation based approach, the minority focussed on the causation which results in legal liability and whether each wrongdoer was a contributor to that same loss or damage. 149 As the fraudsters had no role in causing the lack of security suffered by Mitchell Morgan, their Honours held that they were not concurrent wrongdoers with Hunt & Hunt. 150 IMPLICATIONS OF THE DECISION FOR THE BUILDING AND CONSTRUCTION INDUSTRY The decision in Hunt & Hunt v Mitchell Morgan has a broad impact on the proportionate liability regime generally, but also has some specific implications for the Australian building and construction industry. Many aspects of the judgment and what it represents in practice are AUSTRALIAN CONSTRUCTION LAW NEWSLETTER #152 SEPTEMBER/OCTOBER

11 implications of the proportionate liability regime itself. While the decision does not revolutionise the impact of the regime, it does provide confirmation of the interpretation of same loss or damage. It by no means settles the way that the phrase should be interpreted and applied in future cases, this issue being compounded by the Court s 3:2 split. The split highlights the complexities at play in determining whether tortfeasors are concurrent wrongdoers, and is a reminder to parties to carefully analyse claims against wrongdoers. 151 However, it does give breadth to the direction the law is taking in regards to interpreting legislative provisions, and return the progression of the law to the position it was taking following the trial judgment in this same dispute. 152 On a broad level this decision has been described as a victory of substance over form that will be welcomed by professional indemnity insurers of parties but frowned upon by financiers and similar parties seeking to recover their losses. 153 This is in line with the response to proportionate liability more generally, but its impact is heightened in the wake of this decision because of the re broadening of the scope for joining concurrent wrongdoers to an action. For the industry specifically there is also an increased risk of parties, such as subcontractors, being found to be concurrent wrongdoers with a contractor where they have provided a direct warranty or guarantee to the principal or are in a direct contractual arrangement with the principal. This is because the entering into a direct warranty arrangement or a direct contract creates a duty of care obligation in a situation where such a duty would not have ordinarily have existed, as discussed above While this may be a quality that assists subcontractors and suppliers at the tender application level and may make their bids more attractive to both contractors and principals alike, it is adding a risk onto the subcontractor or supplier where non compliance or breach of the duty of care arises. THE EXPERIENCE IN NEW ZEALAND While the proportionate liability regime has a broad reach within the Australian jurisdictions and is influencing the operation of similar regimes domestically, 154 it is also being used as a comparative model in the current New Zealand proposal to reform their joint and several liability regime. Australia has developed the most extensive proportionate liability regime, while other international models in jurisdictions including Canada, the United States, South Africa and Ireland have limited their reform to the liability of professional advisors. 155 The New Zealand Law Commission is currently investigating a proposed reform to alter their joint and several liability regime to a proportionate liability model, and are drawing on the Australian experience as part of this study. 156 The particular impact of proportionate liability on Australia s building and construction industry is of significance in the New Zealand context because of the complex litigation involving leaky building cases that they are experiencing. 157 In the course of the study, it was observed that under joint and several liability and proportionate liability, the burden of risk is merely shifted between the parties without reducing the complexity of proceedings. 158 This concern is mirrored in the Australian context, 159 the most appropriate example demonstrated in Gunston v Lawley 160 where Byrne J commented that the owners fairly straightforward claims were transformed into a complex and doubtless expensive suite of proceedings, a phenomenon which is regrettably a not uncommon product of the proportionate liability regime now in force. 161 While this observation suggests that the utility of the proportionate liability regime is constrained by the complexities it operates within, it does highlight an area of the Australian experience that is currently under consideration itself for reform. CONCLUSION While the Hunt & Hunt v Mitchell Morgan decision represents the first High Court judgment on proportionate liability, the 3:2 split indicates that the regime is still marred by uncertainty and a divergence in legal opinion. This is evident not just in the differences between the majority and minority judgments, but also the tests each applied to enliven when damage or loss is caused by concurrent wrongdoers. The direction that the High Court is likely to take if another proportionate liability dispute came before it is certain to the extent that subsequent decisions are bound by the doctrine of precedent, but the narrow split in legal opinion does raise a glimmer of uncertainty. Hunt & Hunt v Mitchell Morgan solidifies the place that the regime has within Australian jurisdictions. The particular fact matrix of Hunt & Hunt v Mitchell Morgan typifies the type of disputes that benefit from the application of apportionment of damage and demonstrates how beneficial the regime is for defendants. Within the building and construction industry, for large scale projects with multiple contractual arrangements the decision shifts risk downstream and confirms that each party is only liable for their contribution to the loss or damage suffered. 40 AUSTRALIAN CONSTRUCTION LAW NEWSLETTER #152 SEPTEMBER/OCTOBER 2013