14 May 2015

High Court clarifies the scope of the proportionate liability regime in the Corporations Act

The High Court has decided that the proportionate liability regime in the Corporations Act is limited to a claim based upon misleading or deceptive conduct in relation to a financial product or services, and not to alternative causes of action arising out of the same set of circumstances (Selig v Wealthsure [2015] HCA 18).

This means that claimants in such situations can avoid the operation of the proportionate liability regime by proving, or pleading only, causes of action other than for apportionable claims, even if the circumstances and amount of loss for those alternative claims is the same.

The proportionate liability regime

The effect of the statutory proportionate liability regime is that if the claim is an apportionable claim involving concurrent wrongdoers, a defendant (or concurrent wrongdoer) is only liable to the extent to which they were responsible for the loss incurred by the plaintiff.

The regime was introduced to address the "deep pocket" syndrome and in an attempt to reduce the cost of professional indemnity insurance premiums by shifting the risk of insolvent or under-insured defendants to the plaintiff and providing more certainty for insurers.

Selig v Wealthsure [2015] HCA 18: the proportionate liability scheme didn't apply to all claims

The Seligs invested in a financial product, Neovest, on the advice of an authorised representative of Wealthsure. The product was a Ponzi scheme.

The Seligs sought to recover the loss of their investment and consequential loss against the advisers and the insolvent directors of Neovest. The claim was made on various grounds including the Corporations Act prohibition against misleading or deceptive conduct in relation to a financial product or services (section 1041H), other breaches of the Corporations Act, breach of contract and negligence. The issue before the High Court was the following provision:

… there is a single apportionable claim [meaning a claim for loss or damage caused by conduct that was done in contravention of section 1041H] in proceedings in respect of the same loss or damage even if the claim for the loss or damage is based on more than one cause of action (whether or not of the same or a different kind),

and whether this meant that the other causes of action (which were not apportionable claims) were subject to the proportionate liability regime.

The advisers had been assessed to be 60% responsible and the insolvent directors to be 40% responsible under the proportionate liability regime, however the High Court said that regime applied only to the section 1041H claim and not the other causes of action against the advisers (see below), with the effect that the Seligs could recover 100% of their loss from the advisers.

Practical implications: more claimants might avoid the proportionate liability regime

Claimants with multiple causes of action including apportionable claims for misleading and deceptive conduct may avoid the operation of the proportionate liability regime by also pleading non-apportionable claims. For example, 1041E of the Corporations Act provides a potential alternative cause of action for false and misleading statements likely to induce persons to acquire financial products. This cause of action was pleaded and made out by the Seligs.

In addition to section 1041H of the Corporations Act, there are analogue provisions to be found in section 12DA of the Australian Securities and Investments Commission Act 2001 (Cth) and section 18 of the Australian Consumer Law. The same approach could be used to avoid the effect of the proportionate liability regime applying to those causes of action.

Persons who find themselves named as defendants to proceedings will need to carefully consider whether they are exposed to 100% of liability, if the claim includes apportionable claims and other claims which are not subject to the proportionate liability regime.

The decision also has implications for contractual risk allocation and will need to be carefully considered in that context and in light of whether a party is more likely to be a plaintiff or a defendant.

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Clayton Utz communications are intended to provide commentary and general information. They should not be relied upon as legal advice. Formal legal advice should be sought in particular transactions or on matters of interest arising from this communication. Persons listed may not be admitted in all States and Territories.