Justice Hollingworth unpicks the proportionate liability provisions

In Woods v De Gabriele [2007] VSC 177, Justice Hollingworth has tentatively unpicked some difficult parts of the federal and Victorian proportionate liability provisions in Part IVAA of the Wrongs Act, 1958 (the relevant provisions are here), and in the Corporations Act, 2001 (Cth) and Australian Securities and Investments Act, 2001 (Cth) Division 2, Subdivision GA. Her Honour held that the rule requiring leave of the Court before commencing proceedings against insolvent companies was no barrier to joining an insolvent concurrent wrongdoer under the Wrongs Act, 1958, and suggested the possibility that:

  • if a claim is apportionable (for example because it could have been pleaded as a common and garden variety misleading or deceptive conduct claim under the Fair Trading Act, 1999), it may remain apportionable even if the plaintiff pursues some other cause of action in an attempt to avoid the proportionate liability regime;
  • in the case of alternative causes of action pleaded in support of a claim for compensation for the same loss and damage, some apportionable and some not, all of the claims ought to be bundled up for the purposes of apportionment of that loss and damage, and treated as one apportionable claim; and
  • it is appropriate, on a defendant’s application, to join an alleged concurrent wrongdoer as a defendant rather than a third party even if the plaintiff opposes the joinder.

The judgment only comes out of a pleadings and joinder fight, so the only question determined by her Honour was whether the defendants’ proposal to plead the proportionate liability provisions so as to join the person they wanted joined was arguably correct. Her Honour allowed the defendants to plead the proportionate liability provisions on the basis that the allegations were arguable; whether the old defendants and the new defendants are in fact concurrent wrongdoers and the old defendants are entitled to have the new defendant’s contribution taken into account will be determined at the trial.

The issues

The plaintiff invested in an investment offered by the Westpoint group of companies. The Westpoint Group was a property developer with several developments in Port Melbourne to which receivers were appointed in January 2006. Two thousand investors are suing their financial advisers in a class action. The plaintiff is suing Mr De Gabriele, who allegedly advised him to invest in the Westpoint offering as a result of which he allegedly lost money. Mr De Gabriele was allegedy associated with three different companies. He was allegedly associated with the first at all material times until September 2004 as its authorised representative, and with the second and third after that date, as employee in the case of the second company, and as authorised representative in the third company’s case. Presumably because the first company was in liquidation, the plaintiff did not sue it. Instead, it sued Mr De Gabriele personally, and sued the second and third companies.

Those second and third companies applied for the joinder of the first company, which it alleged was vicariously liable for Mr De Gabriele’s acts and omissions at the time when the plaintiff invested in the Westpoint offering. The second and third companies said that if as the plaintiff alleged, they and Mr De Gabriele were all a legal cause of the plaintiff losing money by investing in the Westpoint offering, then the first company must also have been a legal cause of the plaintiff’s losses too, and under the new proportionate liability regime which they sought to invoke, the plaintiff should only get a judgment against each of the four of them commensurate with how much to blame they each were. Whatever blame could be sheeted home to the first company, if it could be joined as the fourth defendant, would be a bonus for them because it would commensurately diminish the proportion of the blame which would have to be apportioned between them, but would be a bane for the plaintiff, who would be unlikely to recover on the judgment against the first company because of its insolvency. In other words, the second and third companies were asking the Court to compel the plaintiff to sue the first company even though the first plaintiff did not want to do so because it would rather that all its losses be compensated by judgments against solvent defendants who would actually be able to pay them.

An aside: about the proportionate liability system

That is how the proportionate liability scheme is designed to work. Traditionally, the deep pocket would be sued, and, if found liable would be ordered to compensate all of the plaintiff’s losses not attributable to contributory negligence, even if only a bit to blame, and if others were to blame, the deep pocket would have to bring contribution proceedings, or sue for an indemnity in separate proceedings. If one of the others who should shoulder some of the responsibility was insolvent, then the plaintiff got completely compensated by a person who was only partially to blame, and the unlucky person who was sued — often professionals with liability insurance — was unable to recover from the insolvent wrongdoer their share of the blame.

Under the new regime, the deep pocket can apply to join the other people who would be wrongdoers if the plaintiff’s claims are accepted, even if they are insolvent, and the Court will give separate judgments against each defendant, including insolvent ones, appropriate to each defendant’s share of the blame. If most of the legal blame for the plaintiff’s losses is to be shouldered by an insolvent or asset poor defendant, it is the plaintiff’s bad luck.

The plaintiff’s allegations against the defendants

What follows are allegations, not findings of fact. The plaintiff invested about a quarter of a million dollars in December 2002, having retained Mr De Gabriele as the first company’s authorised representative in September of that year, and taken advice from him. When the investment went bad, the plaintiff sued him for negligence. The pleading ultimately relied on asserted:

  • negligence in the form of a breach of an implied duty of to exercise ‘due skill care and diligence’ in the contract of retainer;
  • misleading and deceptive conduct under s. 12(e) and s. 12(n) of the Fair Trading Act, 1999 (‘A person must not, in trade or commerce, in connection with the supply or possible supply of goods or services or in connection with the promotion or advertising by any means of the supply or use of goods or services — … (e) represent that goods or services have a sponsorhip, approval, performance characteristics, accessories, uses or benefits they do not have … (n) make a representation that is false, misleading or deceptive in any material particular.’); and
  • breach of s. 1041H of the Corporations Act, 2001 (Cth) (‘A person must not, in this jurisdiction, engage in conduct, in relation to a financial product or a financial service, that is misleading or deceptive or is likely to mislead or deceive.’)

The plaintiff also alleged that, a year before the investment went bad, he sought advice from Mr De Gabriele, who had by this time gone to work for the second company and was the authorised representative of the third company, about whether he should get out of it, and Mr De Gabriele said no. This advice was said to be misleading and deceptive so as to entitle the plaintiff to damages against the second company, contrary to:

  • s. 12(n) of the Fair Trading Act, 1999 (see above);
  • s. 12DB(1)(e) of the Australian Securities and Investments Act, 2001 (Cth) (which says ‘A corporation shall not, in trade or commerce, in connexion with the promotion by any means of the supply or use of goods or services … (g) make a false or misleading represenation concerning the existence, exclusion or effect of any condition, warranty, guarantee, right or remedy’); and
  • s. 1041H of the Corporations Act, 2001 (Cth) (see above).

The third company was said to be vicariously liable as the second company’s and Mr De Gabriele’s financial services licensee pursuant to s. 917E of the Corporations Act, 2001 (Cth) (‘The responsibility of a financial services licensee under this Division extends so as to make the licensee liable to the client in respect of any loss or damage suffered by the client as a result of the representative’s conduct.’)

The amendments sought to be made by the plaintiff once the defendants started up about proportionate liability were absolutely transparently designed to plead causes of action which are not covered by the proportionate liability regime. For example, the contractual negligence claim morphed from a breach of a term to take reasonable care to one for breach of a term to exercise due care, skill and diligence. A cause of action under s. 9 of the Fair Trading Act, 1999 was replaced with one under s. 12DB(1)(e) of the Australian Securities and Investments Commission Act, 2001 (Cth.), and so on. That is because:

  • it is a characteristic of the proportionate liability regimes in the Wrongs Act, 1958, the Australian Securities and Investments Commission Act, 2001, and the Corporations Act, 2001 that they apply to claims for damages (with some exceptions) for economic loss or property damage arising out of common and garden variety misleading and deceptive conduct (s. 52 of the Trade Practices Act, 1975 (Cth) and its correlates such as s. 9 of the Fair Trading Act, 1999 (Vic.)) but not specifically to the more particular forms of misleading and deceptive conduct proscribed by s. 53 of the Trade Practices Act, 1975 (Cth) and its correlates such as s. 12 of the Fair Trading Act, 1999 (Vic.); and
  • in addition, the Wrongs Act, 1958‘s proportionate liability regime catches claims for damages for any kind of loss arising out of a failure to take reasonable care (whether in negligence, contract, or breach of statutory duty).

Was the first company a concurrent wrongdoer with the second and third companies?

Justice Hollingworth found that it did not matter that the first company, if it were liable, must have been liable for the original advice (for which it was not alleged that the second and third companies were liable), and that it could not have had any liability for the later advice not to pull out of the investment, because at that time, Mr De Gabriele was associated exclusively with the second and third companies. The first company was still a concurrent wrongdoer with the second and third companies. The definition of ‘concurrent wrongdoer’ was: ‘in relation to a claim, [a concurrent wrongdoer] is a person who is one of 2 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.’ So if the plaintiff lost the money he invested, and it was as a result of both the advice to get in and the advice not to get out, then the first company was a concurrent wrongdoer with the second and third companies even though their wrongdoing occurred independently of each other and at different times. There is nothing particularly interesting about that conclusion. It is just a handy little illustration of the relevant principle.

The multiple claims provisions

In the Corporations Act, 2001 (Cth)’s proportionate liability regime, there are two provisions which deal with how multiple claims are to be treated:

  • The first says ‘If the proceedings involve both an apportionable claim and a claim that is not an apportionable claim: (a) liability for the apportionable claim is to be determined in accordance with the [proportionate liability regime]; and (b) liability for the other claim is to be determined [in the ordinary way].’
  • The second says ‘there is a single apportionable claim in proceedings in respect of the same loss or damage, even if the claim for loss or damage is based on more than one cause of action (whether or not of the same or a different kind).’

One resolution of the two provisions’ interrelationship was that, once an apportionable claim was identified, all the causes of action under which the same loss was claimed were to bundled up — regardless of whether the other causes of action were apportionable claims or not — and treated for the purposes of the apportionment of liability as one apportionable claim. A reason why that argument seems strong is that in the particular case of the Corporation Act, 2001 (Cth)’s proportionate liability regime, there is only one kind of apportionable claim, that is, a claim for damages for breach of the prohibition on misleading and deceptive conduct. Under this construction, the first provision’s talk of apportionable claims and unapportionable claims would be taken to refer to such claims which were not pleaded alternatively in pursuit of the same damage.

The alternative resolution was that each cause of action was to be determined separately, even if for the same damage, and apportioned if it was an apportionable claim, and not apportioned if it was not.

Justice Hollingworth refrained from deciding which was the correct construction, but found that the first was not so obviously correct as to not require her to consider the possibility that the trial judge would find that he or she had to consider each cause of action and each associated proportionate liability regime separately.

Can plaintiffs plead around the proportionate liability regime by choosing causes of action ever so cleverly?

Her Honour said that, if conduct was properly characterised as caught by common and garden variety prohibition on misleading or deceptive conduct (archetypically, s. 52 of the Trade Practices Act, 1974), then a deliberate choice to avoid pleading that obvious cause of action in favour of one of the other more particular prohibitions on misleading or deceptive conduct (archetypically, s. 53 of that Act), it was arguable that the claim would be regarded as an apportionable claim anyway:

‘The conduct which is alleged to have contravened ss12DB(1) [the s. 53 TPA correlate] in this case, would also constitute misleading and deceptive conduct contrary to s12DA [the s. 52 TPA correlate]. I agree with the defendants that there is no doubt that the loss claimed under [the damages provision, the correlate of s. 82 TPA] would have been caused by conduct which was in fact done in contravention of s12DA. The question is whether the plaintiff can escape that conclusion simply by framing his claim only under s12DB, and not under s12DA.The defendants referred me to the explanatory memorandum to the Corporations Law Economic Reform Programme (Audit Reform and Corporate Disclosure) Bill 2003, which set out the objectives of the introduction of the proportionate liability regime as being to:

(a) Prevent the ‘deep-pocket’ syndrome which is synonymous with professionals. This syndrome occurs when professionals are the targets of negligence actions not because of culpability but because they are insured and have the capacity to pay large damages awards;

(b) Allow insurers to more accurately price risk. Currently under joint and several liability insurers have to price for the negligent actions of third parties. Proportionate liability enables insurers to insure only against the negligent conduct of the insured;

(c) Assist professionals to obtain suitable cover at more reasonable premiums;

(d) Limit the liability of defendants for the loss suffered by a plaintiff to the extent to which each defendant is responsible for the plaintiff’s loss.

There is much force in the defendants’ submission that the plaintiff’s narrow construction [i.e. that the proportionate liability regime only applies to causes of action specified in the statute, so that if other similar causes of action can be relied on, the regime may be circumvented] would permit the objects of the legislation to be defeated in many cases, simply by the plaintiff changing the legal label attaching to the contravening conduct.’

In relation to the Wrongs Act, 1958‘s proportionate liability regime, her Honour came to the same conclusion. By way of further example, she said that a claim for damages for breach of the contractual duty of care to exercise ‘due’ skill etc. might be apportionable if it could properly be characterised as a breach of a duty to exercise ‘reasonable’ skill etc. which certainly did exist as an incident of a contract for services.

Joinder of the first company

Her Honour joined the first company, having found that there was an arguable case for the second and third companies that they were entitled to rely on the proportionate liability schemes of the various statutes, and that the first company was a concurrent wrongdoer. She found it was appropriate to join it as a defendant rather than as a third party, and held that either leave was not required by s. 471B of the Corporations Act, 2001 (Cth) to commence a proceeding against a company in liquidation or, if it was required, it should be granted.

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