Contents

Changed proportions

GST Certainty

Train of thought

Not a smart investment

Proving what you wouldn't have done

Liability of manufacturer compressed in product liability case

Changed proportions

In a landmark decision which will have far reaching ramifications and be warmly received by plaintiff lawyers, the High Court has curtailed the reach of the proportionate liability regime.

Mr & Mrs Selig invested $450,000 on the financial advice of an authorised representative of Wealthsure Pty Ltd (Wealthsure). Unfortunately the investment was actually part of a Ponzi scheme which failed and Mr & Mrs Selig lost their investment and suffered consequential losses. They sued several parties, including Wealthsure and its agent.

Mr & Mrs Selig claimed that Wealthsure and Mr Bertram had contravened a number of provisions of the Corporations Act 2001. One section of that Act prohibits conduct, in relation to a financial product or service, that is misleading or deceptive. The Act defines an "apportionable claim" as a claim for loss or damage caused by conduct that was done in contravention of that section. The Seligs also based their claim on contraventions of the Australian Securities and Investment Commission (ASIC) Act, which makes no reference to proportionate liability.

The Full Federal Court held that all of the causes of action should be decided on a proportionate basis, because the deciding factor for proportionate liability provisions is whether the claims are in respect of the same loss or damage, as opposed to the nature of the claim itself. Even though the defendants were liable under several provisions of the Corporations Act as well as under the ASIC Act, the claim was apportionable because the conduct giving rise to that loss or damage was conduct in contravention of section 1041H.

This decision left Mr & Mrs Selig in the position of having to recover 40% of their losses from impecunious fraudsters.

Fortunately for them the High Court overturned the decision of the Full Federal Court. It held that the proportionate liability regime in the Corporations Act is specifically limited to misleading or deceptive conduct claims and does not apply to other statutory or common law causes of action. The Court held that this reasoning applied equally to the corresponding provisions of the ASIC Act. Therefore, Mr & Mrs Selig were entitled to recover all their losses pursuant to the non-apportionable causes of action from Wealthsure.

The High Court further held that the circumstances justified an award of costs against a non-party to the proceedings, Wealthsure’s professional indemnity insurer. The insurer had the conduct of the defence at trial and made the decision to appeal to the Full Federal Court.  As Wealthsure’s liability had reached the limit of liability, the decision to appeal meant that some of the insurance proceeds which would otherwise have been available to pay Mr & Mrs Selig would have to be diverted to meet the insurer's legal costs. The Court held that as the insurer was seeking to better its own position by bringing the appeal, there was no reason why it should be regarded as immune from a costs order.

The decision will be seen as favourable to plaintiffs as it preserves the position that proportionate liability can only be pleaded where the relevant provision (whether in the Corporations Act, the Trade Practices Act 1974/Competition and Consumer Act 2010) is subject to apportionment. If the Commonwealth provision does not require the apportioning of liability for the cause of action, apportionment of the relevant damages will be on a joint and several basis.

The third party costs order against Wealthsure’s insurer is a clear indication of how Courts will approach similar situations in future. It was not the defendant, but its insurer, which had the real interest in the appeal and so the insurer itself had to pay the costs.

Selig v Wealthsure

The decision modifies the earlier High Court reasoning in Hunt & Hunt Lawyers v Mitchell Morgan Nominees Pty Ltd that the focus should be upon the “nature of the loss and damage…rather than upon the nature of the…causes of action”. The position now is that the liability of defendants is not to be apportioned if one of the legal bases for it is not subject to an apportionment regime. So for example, a legal right created by Commonwealth legislation is not subject to apportionment under a State’s apportionment legislation, because Commonwealth law takes precedence over State law.

This article was written by Nick Bell, Senior Associate

GST Certainty

The Supreme Court of Victoria has overturned a Magistrates’ decision and reinforced existing law in relation to the application of GST in the settlement of insurance claims.

The plaintiff suffered a loss after one of its garbage trucks was involved in a collision. The plaintiff issued proceedings through a recovery agent against the defendant seeking the cost of repairing the garbage truck. The defendant’s insurer admitted liability for the collision.

Even though the plaintiff was a company registered for GST purposes and was entitled to claim an input tax credit (ITC) for the 10% GST component of the repairs to the truck, it sought the full GST-inclusive sum from the defendant. The plaintiff argued that it did not propose to claim an ITC and was entitled to recover the full cost of repairing the truck. The insurer argued that a company registered for GST purposes is only entitled to recover a GST-exclusive sum in a claim for damages against a tortfeasor.

The Magistrate found in favour of the plaintiff and imposed a complex set of orders whereby:

• the insurer was to pay the plaintiff the full GST-inclusive cost of repairs;
• the plaintiff was to then claim an ITC from the ATO within the next quarter; and
• after claiming the ITC, the plaintiff was then to pay the GST component of the cost of repairs back to the insurer.

The insurer appealed the decision to the Victorian Supreme Court.  In doing so, it argued that the Magistrate’s order contravened the approach taken by other Australian superior courts, did not encourage finality of litigation and misapplied the rules relating to mitigation of loss.

The insurer’s appeal was upheld by Justice Croft. His Honour held that the Magistrate’s orders were unnecessarily complex. His Honour held that the set of orders made by the Magistrate should be applied only in complex taxation cases where there is uncertainty as to the amount of tax to be levied on an award of damages. In relation to mitigation of loss, Justice Croft held that the Magistrate erred by ordering the plaintiff to claim an ITC. His Honour held that the Court is not justified in ordering a plaintiff to mitigate its loss but should rather make an appropriate discount to any award of damages to reflect a plaintiff’s failure to mitigate. His Honour determined that the appropriate measure of loss in such a case is a GST-exclusive figure.

Millington v Waste Wise Environmental Pty Ltd [2015] VSC 167

This case confirmed the general principle applied in insurance settlements, which is that an insurer is only liable to pay a GST-exclusive sum to a claimant company that is registered for GST. This is the first time that this issue has been considered in a Victorian appellate court and is now binding law in Victoria.

This article was written by David Carolan, Lawyer. David acted for the insurer in this case

Train of thought

In overturning a decision by the NSW Supreme Court, the Court of Appeal held that a court ought not to be persuaded by speculation in the absence of actual evidence in relation to relevant events.

After a train had departed the station, the 8 year old plaintiff exited the carriage doors and fell out while the train was travelling at 100 kph. The train doors would pneumatically close on departure from a station and automatically lock when they were in a fully closed position. However, the plaintiff had somehow prevented the doors from fully closing (and therefore locking) when the train left the station. The plaintiff suffered serious injuries including a fractured skull and had no memory of the circumstances leading up to the fall. No witnesses saw what occurred.

The plaintiff sued the state of NSW. Because there was no direct evidence as to how the plaintiff had managed to keep the doors wedged open as the train left the station, a finding as to how he did so had to be based on inferences drawn from the few known facts. After consideration of several possibilities, the trial judge concluded that the plaintiff must have placed a significant part of his body between the doors as the train left the station such that a few minutes later he was able to squeeze his whole body out. On that basis, the trial judge found that the state breached its duty of care as its platform attendant failed to notice that significant parts of the plaintiff’s body were protruding from between the doors and therefore did not give a signal to the driver not to depart the station.

The Court of Appeal considered that there was no reason to exclude other possibilities as to how the plaintiff had managed to keep the doors open as the train left the station. For example, the plaintiff could have used a school bag or other object to keep the doors open.  The trial judge had not adequately explored the possibility of such items being available to the plaintiff. Equally, the wedge which initially kept the doors open could have been the plaintiff’s shoulder, an arm or a leg which the platform attendant may not have noticed in any event.

The Court of Appeal concluded that the evidence did not warrant an inference that the plaintiff’s body was protruding significantly from the train doors when the train left the station. As that was the only circumstance in which the plaintiff contended that a reasonable person in the position of the platform attendant would have noticed and taken action which would have avoided the plaintiff’s fall, the State’s appeal succeeded.

In reaching its finding, the Court of Appeal made clear that it was not for the State to disprove various hypotheses. The onus of proof was on the plaintiff to establish, on the balance of probabilities, that there were no other reasonable hypotheses. It also explained that courts cannot reach factual conclusions where there are conflicting inferences of equal degree of probability such that the choice between them is a mere matter of conjecture.

State of New South Wales v Fuller-Lyons [2014] NSWCA 424

In the absence of evidence, the courts will not speculate in order to make a finding between competing hypotheses. The onus remains on plaintiffs to prove the factual basis of their claim.

This article was written by Liam Fowler, Lawyer.

Not a Smart investment

Mr Lynch was the general manager of a mortgage broking company called QI. Lynch persuaded Mr & Mrs Smart (the plaintiffs) to invest in several short term loans and represented that he would lend the plaintiffs’ money to borrowers for a period of three months and that the plaintiffs would then be repaid the loans plus interest.

The plaintiffs invested a total of $267,000 between July 2007 and October 2007. By May 2008 the plaintiffs’ loans had not been repaid and they demanded that their money be repaid.

It was ultimately discovered that Lynch had never arranged for the money to be lent to QI’s clients and indeed that the clients never existed. It was found that Lynch stole the funds invested by the plaintiffs.

In 2009 QI was declared insolvent and was deregistered. The plaintiffs’ final hope was to recover their investments under QI’s professional indemnity insurance policy. The plaintiffs therefore made an application under s.601AG of the Corporations Act 2001 (Cth) to bring a claim directly against QI’s insurer.

The insuring clause in the policy provided ‘claims made’ professional liability cover.

‘Claim’ was defined as follows:

Claim means any demand by a third party upon the Insured for compensation, however conveyed, including a writ, statement of claim, application or other legal process.

The Court accepted that at some time before the policy period expired the plaintiffs notified QI that they wanted their money returned. The Court also accepted that QI was liable for breach of contract to pay the plaintiffs compensation by way of damages. However, the Court determined on the evidence that at no time prior to expiration of the policy period did the plaintiffs make a ‘Claim’ as defined by the policy.

In making its decision the Court noted that ‘Claim’ was defined in the policy to mean a claim for compensation. The Court highlighted that a claim for restitution should be distinguished from a claim for compensation. The plaintiffs’ demands on QI prior to May 2008 were to get their money back.  Such demands were for restitution rather than compensation. In fact the plaintiffs did not make a claim for compensation until quite some time after the policy expired. The Court therefore determined that the policy did not cover QI’s liability to the plaintiffs and declined to grant the plaintiffs leave to pursue an action against the insurer.

Smart v AAI Ltd; JRK Realty Pty Ltd v AAI Ltd

‘Claims made’ policies continue to be problematic for third parties wanting to claim on them directly.

This article was written by Kate Lawford, Lawyer.

Proving what you wouldn’t have done

Litigation between Optus and Attradius Credit Insurance NV has given rise to a number of reported judgments.

Optus made a claim under its trade credit policy after some of its major customers went broke, owing Optus over $60M. The insurer reduced its liability for the claim to nil pursuant to section 28(3) of the Insurance Contracts Act on the basis that the insurer would not have granted cover if Optus had given truthful and complete answers in the proposal. The relevant answers concerned the credit-worthiness of one of Optus’ customers.

Section 28(3) allows an insurer (which has not avoided the policy) to reduce its liability for a claim to the amount that would place the insurer in the position in which it would have been if the failure to disclose had not occurred.

The trial judge found in favour of the insurer. Optus appealed on the basis that the insurer had only called its most senior decision-maker to give evidence, and not also the employees from lower down the chain of command who would have had input into the final decision.

The NSW Court of Appeal rejected Optus’ argument:

“It was not incumbent upon [the insurer] to prove each step that would have been taken within its organisation in the hypothetical circumstance that section 28(3) of the Insurance Contracts Act required to be addressed.  Section 28(3) does not specify any particular mode of proof that need be adopted by the insurer.  It is sufficient for it to prove on the balance of probabilities what the outcome would have been in the hypothetical circumstance. [The insurer] did this.”

Prepaid Services Pty Ltd v Atradius Credit Insurance (2015).

In order to prove that an insurer would not have accepted a risk if proper disclosure had occurred, no particular kind of proof is required such as calling every person involved in making the decision to give evidence. It is sufficient if the evidence adduced by the insurer proves on the balance of probabilities what the outcome would have been if, hypothetically, proper disclosure had occurred.

Liability of manufacturer compressed in product liability case

The Western Australian Court of Appeal has provided a reminder that it is significantly more difficult to prove negligence in a product liability case than it is to prove breach of contract on the basis of implied terms and conditions imposed by statute.

The plaintiff was a drilling company involved in mineral exploitation in Western Australia and it purchased a TS24 compressor from its supplier. The supplier had sourced the compressor from an American manufacturer and made representations to the plaintiff that it would be appropriate for use in the plaintiff’s business. The compressor failed and was repaired on eight separate occasions before the plaintiff ultimately determined that it was uneconomical to continue operating it. As a result of the failures, the plaintiff suffered economic loss and sued the supplier for breach of contract and sued the American manufacturer for negligence.

The trial judge accepted evidence that the majority of contractors which had used TS24 compressors for mining in Western Australia had experienced similar failures to those experienced by the plaintiff. It was determined that the TS24 was not fit for its intended purpose and was not of merchantable quality and that the supplier had breached its contract with the plaintiff in accordance with the provisions of the Sale of Goods Act 1895 (WA).

Notwithstanding the finding that the compressor was not fit for its intended purpose, the trial judge was not satisfied that the plaintiff had proven negligent design or manufacture and dismissed the plaintiff’s claim against the manufacturer. The plaintiff appealed the decision and argued that the evidence supported an inference that there was no other explanation for the failure of the compressor (both in the plaintiff’s business and in other businesses) other than that the design or manufacture of the TS24 compressor was negligent.

The Court of Appeal dismissed the appeal and determined that it was incumbent on the plaintiff to prove the actual cause of the failure. The plaintiff did not present any expert evidence identifying a specific defect in the compressor that caused the failures; nor did the plaintiff adduce any evidence comparing the design of the TS24 compressor to other compressors in the market. The Court determined that it could not substitute an assumption for evidence and it could not simply assume that in the absence of another explanation for the failure of the compressor, it must have been negligently designed or manufactured.

Swick Nominees Pty Ltd v Leroi International Inc [2015]

It is well-established that a manufacturer does not owe a duty of care to ensure that a product is fit for its intended purpose.  It is easier to prove breach of implied warranties concerning fitness for purpose than it is to prove negligence

This article was written by Liam Campion, Senior Associate.