This is the appeal from the NSW Court of Appeal decision Mitchell Morgan Nominees v Vella  NSWCA 390.
This is the first High Court case on the proportionate liability legislation. A fraudster forged a loan and mortgage, falsely witnessed by his lawyer cousin. The lender’s solicitors, Hunt & Hunt prepared the advance and negligently drafted the mortgage to secure the indebtedness under the loan, rather than inserting the amount of the loan in the mortgage itself.
The mortgage became indefeasible upon registration but was a nullity because it secured nothing, the loan being forged. This deprived the lender of claiming against the Torrens Assurance Fund.
The lender next looked to its solicitors Hunt & Hunt to recover. The Hunt & Hunt admitted negligence but argued that their liability should be proportionately reduced to reflect the more heinous culpability of the fraudsters. The trial judge agreed and apportioned liability 72.5% to the fraudster, 15% to his cousin and 12.5% to the lender’s solicitors. The lender appealed.
The NSW Court of Appeal reversed the trial judge decision and found that proportionate liability did not apply because the damage caused by the fraudsters (the advance) was a different type of damage to that caused by the lender’s solicitors (the defective mortgage). The separate loss caused by the lender’s solicitors was suffered not because the money was lent but because it could not be recovered from the defective security. This increased the Hunt & Hunt’s liability to 100% and they appealed to the High Court.
The High Court by a 3:2 majority disagreed with the Court of Appeal and reinstated the trial judge decision, finding that the damage was the same. The ultimate damage caused by the lender’s solicitor was an inability to recover the loan monies, the same damage caused by the fraudsters.
The High Court confirmed that the proportionate liability regime and common law permit a wrongdoer’s acts to be independent of those of another wrongdoer, yet cause the same damage. The High Court found that the lender suffered loss by reason of both the fraudulent conduct and the negligence of the solicitors. The court held that while the fraudsters started the doomed transaction and induced the lending, the lender’s solicitors failed to protect the lender’s economic interests within that transaction:
In determining the question of causation, it is necessary to keep clearly in mind the harm suffered by the lender: its inability to recover monies advanced. Merely to then state the obvious facts – that the monies were advanced under the loan agreement and the security of the mortgage – is to acknowledge that the harm suffered has more than one cause.
The High Court allowed the appeal reinstating the original 12.5% apportionment against the lender’s solicitors.
There are two morals to this story for lenders:
- Should the solicitor acting for you on an advance negligently allow a fraud to slip through you will get precious little by suing the solicitor. Thus it is of vital importance to use experienced mortgage solicitors who will not let the fraud through in the first place.
- All monies mortgages should not be used unless necessary. When they are used extra precautions should be taken to identify the borrower and possibly title insurance should be obtained. The lender in this case had title insurance and the matter was fought by the title insurer exercising its rights of subrogation.