Australia: The Blame Game - How moral culpability plays a role in the application of proportionate liability legislation

A recent case shows moral culpability is a factor in apportioning responsibility under proportionate liability legislation.

The decision of Justice Young of the Supreme Court of New South Wales in Vella v Permanent Mortgages Pty Ltd [2008] NSWSC 505 (Vella) clarifies how a Court will allocate loss in the context of a mortgage transaction perpetuated by fraudsters under the proportionate liability provisions of the Civil Liability Act 2002 (NSW) (CLA).

The decision also provides insight into the standard of care expected of professionals under section 5O of the Act, and stands as a warning to those operating in the low document short term loans sector of the mortgage lending industry.

The facts

The plaintiff, Mr Vella (Vella) sought a declaration for two mortgages over several parcels of land owned by him. The proceeds were deposited into a bank account he jointly held with his business partner, Mr Caradonna (Caradonna).

In 2005, Vella and Caradonna uplifted certificates of title over a number of Vella's properties. Vella understood this was for the purpose of consolidating loans on his properties, associated with their joint business venture. In fact, the certificates were used by Caradonna and a finance broker, Mr Rutty, to obtain a number of loans from Permanent Mortgages Pty Ltd (Permanent) and Mitchell Morgan Nominees Pty Limited (trading as La Trobe) (Mitchell Morgan). Hunt & Hunt Solicitors (Hunt & Hunt) acted for Mitchell Morgan on the loan transaction.

Vella instigated proceedings in the Supreme Court seeking to have the mortgages set aside on the basis that they had been forged and he never received money pursuant to the mortgages. The form of mortgage used by Hunt & Hunt was an 'all moneys' mortgage.

Mr Flammia (Flammia) was a solicitor appointed by Caradonna, to allegedly act on behalf of Vella in relation to the loan applications. Flammia signed the mortgage documents certifying that he had witnessed Vella's signatures. He had not done so.

Despite a number of signs warning of fraud, the loans were approved. This resulted in loans together totalling over $2.4 million being deposited into the joint account of Vella and Caradonna, of which only $300,000 had 'knowingly' been approved by Vella. Caradonna then advanced the entire $2.4 million to himself, using cheques signed by himself and Vella's forged signature.

The decision

Ultimately, Justice Young held that the mortgages were unenforceable, and orders were made restoring Vella to the title in his properties unencumbered by the mortgages of Permanent or Mitchell Morgan. In doing so, the Court applied the earlier decision of Perpetual Trustees Victoria Limited v Tsai [2004] NSWSC 745.

The Court then considered:

• Whether Hunt & Hunt had been negligent in using an 'all moneys' mortgage without warning Mitchell Morgan that that type of mortgage would not give it indefeasibility of title against an innocent owner, in the event of fraud.

• If so, how the loss should be apportioned between Flammia, Caradonna and Hunt & Hunt.

The standard of care of professionals

In determining Hunt & Hunt's liability, the Court examined the operation of section 5O of the CLA, which makes it a defence for a professional to show it acted in a manner which was 'widely accepted in Australia by peer professional opinion as competent professional practice'. Justice Young held that:

• Section 5O will only operate to determine the standard of care expected of a professional in the event that evidence is called on peer professional practice and, in that instance, 'it is the profession that sets the standard' (unless that standard is 'irrational').

• If no evidence is called, then the Court will determine the matter using 'traditional principles' and 'the standard of care to be observed by a person with some special skill or competence is that of the ordinary skilled person exercising and professing to have that special skill': as per the High Court in Rogers v Whitaker (1992) 175 CLR 479. To this end, Justice Young made some useful comments on the standard of care expected of professional solicitors, including that:

In this case, expert evidence was adduced by Hunt & Hunt that 'all moneys' mortgages were the most common form of mortgage used in Australia. This was not sufficient to convince Justice Young that Hunt & Hunt complied with peer professional practice in this case. In his Honour's judgment, Hunt & Hunt should have advised of the risks of employing that standard form of 'all moneys' mortgage in every case.

Principles of apportionment

The Court then considered principles of proportionate liability. The Court determined that the claim against Hunt & Hunt was determined to be an 'apportionable claim' and that both Flammia and Caradonna were concurrent wrongdoers. Hunt & Hunt submitted that its liability should be restricted to 5% of the loss in circumstances where Caradonna and Flammia were guilty of actual fraud.

In apportioning Hunt & Hunt's liability, Justice Young determined that nothing turned on the difference between the use of the word 'just' in section 35 of the CLA, and the words 'just and equitable' in section 5 and section 9 of the Law Reform (Miscellaneous Provisions) Act 1946 (NSW), which relate to contribution between tortfeasors and contributory negligence respectively. As a result, the Court could consider similar judgments on apportionment made in decisions applying contribution and contributory negligence principles.

His Honour referred to the apportionment exercise applied in various contributory negligence cases, including as set out by the High Court in Podrebersek v Australian Iron & Steel Pty Ltd (1985) 59 ALJR 492 at 495:

Justice Young also referred with approval to Justice Palmer's guidelines in Yates v Mobile Marine Repairs Pty Ltd [2007] NSWSC 1463, which specifically related to the application of section 35, being that a judge 'must make a comparison of the culpability of the acts of the parties causing damage and, thus, to the relative blameworthiness and relevant causal potency of the negligence of each party'.

Here, Justice Young stated that it was clear that, of the various wrongdoers, the most morally blameworthy was Caradonna who orchestrated the fraud. Flammia had played a significant, but relatively minor part. As to percentages, Justice Young was 'guided' by the previous decisions of the NSW Supreme Court in Ginelle Finance Pty Ltd v Diakakis [2007] NSWSC 60, in which His Honour Justice Hoeben found the proper apportionment was 90% to the fraudster and 10% to the solicitor, and to an almost identical result in Chandra v Perpetual Trustees Victoria [2007] 13 BPR 24, 675 (per Bryson J).

Hunt & Hunt was determined liable for 12.5% of the loss, on the basis that they were retained to protect the client from what actually happened. Caradonna as the 'major contributor' was apportioned liability of 72.5%, and Flammia's a little more than Hunt & Hunt at 15%.

Although contribution claims are not available to parties whose liability has been limited by proportionate liability, that party can make a cross-claim seeking a full indemnity for their apportionment of the loss. Hunt & Hunt had issued a cross-claim against Flammia asserting misleading and deceptive conduct in purportedly witnessing Vella's signature. This cross-claim succeeded in this instance (for what it was worth).

The final point of note in this matter is in relation to damages and the claim for the lost principal plus interest. As to interest, Mitchell Morgan had sought to recover interest at the rates it charged under the mortgage. The subject loan was for two months at a rate of 78% per annum, reduced to 54% per annum for prompt payment!

The Court would not accept interest at this rate, ordering interest pursuant to section 100 of the Civil Procedure Act 2005 (NSW) from the date of payment out of the moneys. The Court applied a stringent approach to what is required to prove a claim for interest as damages. It is the plaintiff who bears the onus of establishing the loss of interest, which is not presumed to arise from the mere withholding of money.

Implications

The Vella decision highlights the fact solicitors must take care in the routine application of standard form documents and processes, without applying an independent consideration to the particular facts of a case.

For professionals generally (and those who insure them) the decision is positive, insofar as it restates the Courts' willingness to apportion a significant proportion of the claim to a 'fraudster' or 'more culpable party'. The case also shows that even where a proportion of the claim is allocated to the professional party involved, the apportionment may be further reduced by the use of an 'indemnity' cross-claim.

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