Federal Court Dishes Out Some Serious Proportionate Liability Interpretation

Melbourne’s Justice Middleton has dished out some serious interpretation of the Victorian and federal proportionate liability regimes and, what’s even more useful, their interrelationship, in Dartberg Pty Ltd v Wealthcare Financial Planning Pty Ltd [2007] FCA 1216, a decision at an early stage of the proceedings. It is a classy judgment in a matter right up Justice Middleton’s alley; before going to the bench, his Honour led a team of lawyers in Victoria’s biggest pure economic loss case.

The only relevant ratio decidendi is that Part IVAA of the Wrongs Act, 1958 (Victoria’s proportionate liability regime) cannot apply to causes of action under federal statutes which evince an intention not to allow apportionment. It is not that the Commonwealth statute prevails by operation of s. 109 of the Constitution over the state statute, the Commonwealth statute covering the field. Rather, the reason is that state Acts do not apply in courts exercising federal jurisdiction (such as the Federal Court in this case) unless s. 79 of the Judiciary Act, 1903 (Cth.) applies, and it only applies unless a Commonwealth Act otherwise provides. Drawing on the High Court case which said there can be no defence of contributory negligence against a claim for misleading or deceptive conduct under s. 52 of the Trade Practices Act, 1974, his Honour concluded that the relevant parts of the ASIC Act, 2001 and the Corporations Act, 2001 did ‘otherwise provide’.

Interesting dicta about the Victorian proportionate liability regime (relevant provisions here) includes:

  • there is a question whether only state statutes are intended to be referred to in the definition of apportionable claim in the Wrongs Act, 1958, which says ‘a claim for economic loss … in an action for damages (whether in tort, in contract, under statute or otherwise) arising out of a failure to take reasonable care’ (at [27]);
  • ‘The provisions do not require that the claim itself be a claim in negligence or for a breach of duty — it [sic.] only requires that the claim arise from a failure to take reasonable care’ (at [29]);
  • a defendant seeking to apportion blame against a concurrent wrongdoer must plead out the basis for asserting that the concurrent wrongdoer is liable to the plaintiff (at [31]);
  • each concurrent wrongdoer must have a legal liability to the plaintiff (at [40]);
  • preliminary discovery might be had under the Federal Court correlate of Order 32.05 of the Supreme Court Rules against a person to ascertain whether they are a concurrent wrongdoer against whom apportionment might be claimed (at [42]).

No consideration of federal proportionate liability regime applying by analogy to causes of action similar to those specifically mentioned in the statute setting up the regime but not themselves mentioned

The applicant asserts it was induced by the respondent financial planner to invest in some entities associated with Westpoint by conduct in breach of, amongst other provisions, s. 12DB of the Australian Securities and Investments Act 2001, and s. 1021A of the Corporations Act, 2001.

In each proportionate liability scheme, the definition of apportionable claim mentions only misleading or deceptive conduct under s. 52 of the Trade Practices Act, 1974 or that section’s closest correlate in the associated legislation.  There are other provisions which are similar and can often be availed of so as to avoid reliance on s. 52.  Consider, for example, ss. 53, 55 and 55A, and bear in mind the extraordinarily wide definitions of both ‘goods’ and ‘services’ in the Act.

The analogues of s. 52 of the Trade Practices Act, 1974 in those Acts are s. 12DA and s. 1041H, which the applicant did not rely on. Whether the federal scheme applied was an outstandingly simple question for Justice Middleton. There was no discussion about whether a claim under s. 12DB should be considered to be, as a matter of substance a claim under s. 12DA so that the proportionate liability scheme applied. That is how it should be; it gives effect to the plain words of the statute, but on close analysis might turn out to be different in tenor from some of the observations of Justice Hollingworth in Woods v De Gabriele [2007] VSC 177.

Victoria’s proportionate liability regime does not apply to certain federal causes of action

The next question was whether the Victorian proportionate liability scheme in the Wrongs Act, 1958 (Vic.) applied. Justice Middleton said no, so that his comments on the Victorian scheme were strictly obiter. The reason it might have applied was s. 79 of the Judiciary Act, 1903 (Cth) which says (some words omitted):

‘The laws of each State, including the laws relating to procedure shall, except as otherwise provided by the laws of the Commonwealth, be binding on all Courts exercising federal jurisdiction in that State in all cases to which they are applicable.’

His Honour held that a law of the Commonwealth did provide otherwise. That law was the law set out in the provisions of the ASIC Act, 2001 and the Corporations Act, 2001 relied on by the applicant. Justice Middleton had earlier determined that in the absence of any statutory provision allowing for a defence of contributory negligence, no such defence could succeed against any of the claims pleaded by the applicant. They were insufficiently dissimilar to s. 52 of the Trade Practices Act, 1974 for the logic in I&L Securities Pty Ltd v HTW Valuers (Brisbane) Pty Ltd (2002) 210 CLR 109 not also to apply to them. In that case, the High Court confirmed that there could be no apportionment for the plaintiff’s own blameworthiness in a misleading or deceptive conduct claim under s. 52 (though where the cause of action arose on or after 26 July 2004, see now s. 82(1B) of the Trade Practices Act, 1974). His Honour explained at [33] to [34]:

‘For the reasons I have enunciated above in relation to the express purpose of the [provisions relied on by the applicant], in my view [that legislation] has otherwise provided for the determination of liability to compensate a person who has suffered loss or damage by conduct in contravention of [that legislation]. [Its purpose] is to impose a specific and comprehensive regime imposing liability according to its terms, and to give an entitlement to an applicant to recover the whole amount of which it is established under such enactments the applicant is entitled to recover.

I do not accept that Pt IVAA of the Wrongs Act is complementary to the operation of [the legislation relied on by the applicant]. This would be inconsistent with the whole purpose [of the legislation relied on by the applicant], for to allow Pt IVAA of the Wrongs Act to apply would be to detract from the operation and effect of the Commonwealth Legislation, as the applicant would not necessarily be entitled to full compensation from a wrongdoer as contemplated.’

Might the Victorian proportionate liability regime apply to claims for breach of duties imposed by Commonwealth statutes, so long as they are caught by s. 79?

Section 24AF(1)(a) of the Wrongs Act, 1958 says, in part:

‘This part applies to a claim for economic loss … in an action for damages (whether in tort, in contract, under statute or otherwise) arising from a failure to take reasonable care’.

Justice Middleton noted a question about whether ‘under statute’ meant under a Victorian statute or under a Victorian or Commonwealth statute, but did not resolve it.

Is a negligence claim required (claims under s. 9 of the Fair Trading Act, 1999 aside) in order to attract the Victorian regime, or only something arising out of a failure to take reasonable care?

His Honour at [29] noted that ‘The provisions do not require that the claim itself be a claim in negligence or for a breach of duty — it [sic.] only requires that the claim arise from a failure to take reasonable care,’ and continued, at [30]:

‘Pt IVAA could apply in the circumstances of this proceeding according to its own terms. Where a claim brought by an applicant does not have as one of its necessary elements any allegation of failing to take reasonable care, an additional enquiry into the failure to take reasonable care may become relevant in the course of a trial to determine the application of Pt IVAA. Even though the claims in this proceeding do not rely upon any plea of negligence or a “failure to take reasonable care” in a strict sense, a failure to take reasoanble care may form part of the allegations or the evidence that is tendered in the proceedings. At the end of the trial, after hearing all the evidence, it may be found that Pt IVAA applies.’

Defendant’s pleading obligations against concurrent wrongdoer

Justice Middleton suggested at [31] that:

‘where a respondent desires to rely upon Pt IVAA of the Wrongs Act, it will need to lead and prove each of the statutory elements, including the failure to take reasonable care. In a proceeding where the applicant does not rely upon any such failure, then the need for a particularised plea by a respondent may be particularly important for the proper case management of the proceedings: see eg Ucak v Avante Developments Pty Ltd [2007] NSWSC 367 at [41]. It would be desirable at an early stage of proceedings for a respondent to put forward the facts upon which it relies in support of the allocation of responsibility it contends should be ordered. If a respondent calls in aid the benefit of the limitation on liability provided for in Pt IVAA of the Wrongs Act, then the respondent has the onus of pleading and proving the required elements. The court, after hearing all the evidence, will then need to determine, as a matter of fact, whether the relevant claim brought by the applicant is a claim arising from a failure to take reasonable care.

Might a defendant have preliminary discovery against a person it thinks might be a concurrent wrongdoer?

In the most classic blame-shifting exercise of all — the very kind of deep pocket mining sought to be ameliorated by proportionate liability — the respondent sought to apportion blame against the auditors of the companies invested in by the applicant. Since Part IVAA of the Wrongs Act, 1958 — proportionate liability — did not apply, his Honour considered the question on the basis of a claim for old fashioned contribution under s. 23B of Part IV. In fact, what the respondent was seeking was preliminary discovery in aid of a possible claim for contribution. The respondent wanted to say (these are my words):

‘If through my breach of the ASIC Act and the Corporations Act you suffered loss, that loss was also caused by the auditor’s negligent audit of the accounts of the companies you invested in in breach of a duty they owed not to their clients, the companies, but to you, an investor in their clients, that is, they breached a duty of care to avoid pure economic loss they owed to you as a third party to their professional relationship of auditor and client. Since we both caused your loss, we should be able to get contribution from them towards our liability to you.’

Justice Middleton held that that proposition was not so misconceived architecturally as to preclude preliminary discovery to ascertain whether such a cause of action was in fact available, but the absence of any evidence of a negligent mistake as opposed to a simple error, despite expert evidence on KPMG’s audits, meant that what is required for a successful preliminary discovery application was not present. What is required is that ‘the evidence must incline the mind to the conclusion that there is reasonable cause to believe that the necessary elements of the potential cause of action may exist’.  So while there was, arguably, a duty of care, there was no evidence of its breach.

The important thing for readers of this blog is that his Honour did not think there would have been anything conceptually wrong about the preliminary discovery application had the proportionate liability scheme applied, saying at [42]:

‘[The auditors] submitted that [the preliminary discovery provision] had no application because there was no basis for the respondents to rely upon Pt IVAA of the Wrongs Act [the Victorian proportionate liability regime] in support of the contention that they may have a right to obtain relief from [the auditors]. I do not accept that submission. If the respondents could rely upon Pt IVAA of the Wrongs Act so as to limit their liability to the applicant, the respondents must in the first instance be able to identify the existence of a concurrent wrongdoer within the meaning of s 24AH of the Wrongs Act. The alleged concurrent wrongdoer must then be joined as a party to the proceeding (see s 24AI(3)), and will be a defendant within the meaning of s 24AE of the Wrongs Act. The respondents would then be able to rely upon any reduction in liability. The respondents before me would be able to seek, inter alia, declaratory relief against [the auditors] to the effect that [the auditors are concurrent wrongdoers] within the meaning of s 24AH. It seems to me that any joinder of [the auditors] in these circumstances gives rise to the right to obtain relief by the respondents against the potential concurrent wrongdoer, namely [the auditors], within the meaning of [the preliminary discovery provision]. It does not matter that [the auditors have] no liability in monetary terms to the respondents, just that the respondents may have the right to obtain relief from [the auditors], in the events postulated, by way of declaration. There would clearly be a controversy between the respondents and [the auditors], as there would be between each of them and the applicant.’

A concurrent wrongdoer must have a legal liability to the plaintiff

Justice Middleton observed at [40]:

‘For the reasons set out above, Pt IVAA cannot be relied upon by the respondents for the purposes of seeking relief against [the auditors]. If reliance could be placed upon Pt IVAA of the Wrongs Act, it was argued by the respondents that the existence of a duty of care being owed by [the auditors] to the applicant to avoid the relevant economic loss, as distinct from some other relevant party, may not be required. In my view, having regard to the language of ss 24AH(1) and 24AI(1), the operation of s 24AJ, and the fact that the loss or damage referred to in s 24AH(1) is not divisible in terms of causation, it seems to me that the concurrent wrongdoers must each have committed the relevant legal wrong against the applicant. This conclusion seems to be implicit in the reasoning of the Court of Appeal in Witherow [2006] VSCA 45, although the issue does not appear to have been addressed specifically.’

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