Focus: High Court limits proportionate liability regime and expands insurers' liability for costs
14 May 2015
In brief: The High Court yesterday overturned a decision of the Full Court of the Federal Court and held that if the same loss is caused by both apportionable and non-apportionable claims, proportionate liability does not apply to the non-apportionable claims. The High Court also ordered that the defendant's insurer pay the costs of the appeal, resulting in its total liability being greater than the limit of indemnity under the policy. Partners Malcolm Stephens (view CV) and Jenny Campbell (view CV) and Senior Associate Mark Hare examine the decision and its implications.
How does it affect you?
- Plaintiffs will be able to avoid the proportionate liability regimes and target 'deep-pocketed' or insured defendants if they can succeed on causes of action to which the regimes do not expressly apply.
- Insurers should consider their potential exposure to non-party costs orders when defending claims against impecunious insureds, and take that exposure into account when setting their reserves.
The proportionate liability regimes in Australia generally apply where:
- a defendant is found to have engaged in negligent, misleading or deceptive conduct; and
- the loss suffered by the plaintiff was also caused by another 'wrongdoer'.
The effect of the regimes is that the defendant's liability is reduced to the amount the court considers just, having regard to the extent of their responsibility for the loss. This avoids the outcome, according to the doctrine of joint and several liability, where a (usually 'deep-pocketed' or insured) defendant is liable for the entire loss even where that loss is caused by multiple wrongdoers.
It is common, in proceedings alleging negligence or misleading or deceptive conduct, for plaintiffs to also allege contraventions of other statutory duties that are not expressed to be subject to proportionate liability – for example, section 1041E of the Corporations Act 2001 (Cth), which prohibits knowingly, recklessly or negligently publishing false or misleading statements.
The proportionate liability regimes apply to 'apportionable claims' – typically claims in negligence or for misleading or deceptive conduct. A controversial issue in recent years has been whether proportionate liability applies where a plaintiff succeeds on both apportionable and non-apportionable claims in respect of the same loss.1 The question was whether these claims should be treated as 'apportionable', and therefore subject to proportionate liability, if they relate to the same loss caused by conduct done in contravention of a statutory duty that is expressed to be apportionable.2
Yesterday, in Selig v Wealthsure Pty Ltd3, the High Court unanimously held that proportionate liability under the Corporations Act is only available in respect of claims for misleading or deceptive conduct under s1041H of the Act.4 Claims under the other sections that can give rise to liability under s1041I (including s1041E) are not apportionable, even if those contraventions give rise to the same loss.
The effect of the decision is that proportionate liability will not apply to the extent a plaintiff succeeds on non-apportionable claims, even if the same conduct also gives rise to an apportionable claim. This means that, where a plaintiff has non-apportionable claims against multiple defendants:
- it is not necessary for it to sue all of those defendants in order to recover all of its losses; and
- if it is successful against multiple defendants, it can choose from which one, or more, of those defendants to recover its losses.
The decision highlights the limited protection that is afforded to defendants under the proportionate liability regimes. Deep-pocketed or insured defendants continue to face the possibility of being targeted (to the exclusion of other wrongdoers) where the plaintiff succeeds on a non-apportionable claim. A perceived need to limit the circumstances in which this scenario arises (because of its effect on insurance premiums) was a key reason for the introduction of the proportionate liability regimes.
Nothing in the decision limits the ability of a targeted defendant to seek contribution from others involved in causing the loss, but it puts the burden of doing so (and risk of non-recovery) on the defendant rather than the plaintiff in respect of any non-apportionable claim. The question of whether this is the appropriate position now seems to be a matter for the legislature.
A separate aspect of the High Court's judgment that will be of particular concern to insurers was the decision to award costs directly against the defendant's insurer. The court applied a very broad 'interests of justice' test in making this award. The two factors that appear to have been most important to the court were:
- the defendants were unlikely to have sufficient assets to meet the judgment and the adverse costs order; and
- the cover provided by the policy was costs-inclusive, so that the decision of the insurer to bring appeals effectively reduced the amount available to the plaintiffs.
The consequence for an insurer is that, despite having acted entirely reasonably, the insurer may be ultimately responsible for an amount significantly higher than its limit of liability under the policy. It remains to be seen whether courts will make adverse costs orders where only one of the above factors applies. Insurers should, therefore, consider their potential exposure to non-party costs orders when defending claims against impecunious insureds and take that exposure into account when setting their reserves.
- The issue arises under the proportionate liability regime in the Corporations Act, primarily due to the wording of s1041L(2). It also arises under the proportionate liability regimes in the Australian Securities and Investments Commission Act 2001 (Cth) (s12GP(2)) and Competition and Consumer Act 2010 (Cth) (s87CB(2)) and under some state regimes: see, for example, s34(2) of the Civil Liability Act 2002 (NSW), which is similar to s1041L(2). In contrast, s24AF(2) of the Wrongs Act 1958 (Vic) is worded slightly differently, so that it was quite clear that the Victorian regime would not apply to non-apportionable claims.
- Last year, in the context of misleading or deceptive conduct under the Corporations Act, two Full Federal Court decisions (Wealthsure Pty Limited v Selig  FCAFC 64 and ABN AMRO Bank NV v Bathurst Regional Council  FCAFC 65) reached opposite conclusions as to whether claims under s1041E were subject to proportionate liability.
Selig v Wealthsure Pty Ltd  HCA 18.
- The High Court made a similar finding in respect of the equivalent provisions of the ASIC Act.
- Malcolm StephensPartner,
Ph: +61 2 9230 4828
- Jenny CampbellPartner,
Ph: +61 2 9230 4868
- Andrew MaherPartner,
Ph: +61 3 9613 8022
- Belinda ThompsonPartner,
Ph: +61 3 9613 8667
- Ross DrinnanPartner, Practice Leader, Disputes & Investigations,
Ph: +61 2 9230 4931
- Geoff RankinPartner,
Ph: +61 7 3334 3235
- Philip BlaxillPartner,
Ph: +61 8 9488 3739
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