Proportionate Liability may leave lenders precious little

The first High Court case on the proportionate liablity legislation is Hunt & Hunt v Mitchell Morgan Nominees [2013] HCA 10. The majority of the High Court clarified the law and found that where you have independent causes of the same loss, the proportionate liability legislation applies. In that case, the lender suffered loss by reason of both the fraudster forging a loan and mortgage and the negligence of the lender’s lawyers in using an all monies mortgage. 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. Hence the lender’s loss had more than one cause but the loss was the same – an inability to recover monies advanced.

The practical effect of this decision is that lawyers will be able to reduce their liability in line with the proportion for which they are held responsible. The High Court clarified that independent causes of the same loss does not make the loss different. The independent causes of loss provide two sources of recovery such that the loss is the inability to recover from either source. The High Court reversed the decision of the Court of Appeal, which found that the loss caused by the fraudsters (the advance) was a different loss to that caused by the lender’s solicitors (the defective mortgage). The effect of the reversal was to reinstate the trial judge’s 12.5% apportionment of the loss against the lender’s lawyers. In this regard, the High Court found that given the role played by the fraudsters they should be apportioned the bulk of the blame with the lawyers only being responsible for 12.5%. This was the proportion found by the trial judge.

The key to working out whether the legislation applies, is to correctly identify the damage or loss. To attempt to segregate aspects of a lender’s loss by reason of its cause will not aid in the identification of the ultimate loss, which here was an inability to recover money. The decision is important because the High Court recognised that a wrongdoer’s acts may be independent of another wrongdoer yet cause the same damage.

The minority reached a different conclusion because it segregated different aspects of the lender’s loss by focussing on their different causes. The minority was of the view that since the lender suffered loss by reason of their lawyer’s negligence in protecting them against fraud, and nothing was done by the fraudster to cause the lack of security, the consequences of the fraud itself was not part of the loss and the lawyers were fully liable.

The High Court decision is good for lawyers, valuers and others involved is protecting people against risk because they may avoid 100% liability if they can point to another source of loss. The decision is bad for lenders because they may get precious little from the only source available to sue and for that reason, lenders should be alert to fraud and use only experienced mortgage lawyers.

Scroll to Top