Proportionate liability - solicitors found not to be concurrent wrongdoers with fraudsters

In brief – Solicitors’ obligations to protect clients from fraud

The Court of Appeal decision in Mitchell Morgan Nominees Pty Ltd & Anor v Vella & Ors [2011] NSWCA 390, Unreported 15 December 2011 assists in analysing whether another party is a "concurrent wrongdoer" for the purposes of Part 4 of the Civil Liability Act NSW (2002).

It is vitally important for solicitors whose practice involves drafting mortgages in considering their obligations to protect their clients from fraud.

Can loss suffered by lender be apportioned between negligent solicitors and fraudsters?

Giles JA (with Bathurst CJ, Campbell JA, Macfarlan JA and Sackville AJA agreeing) considered whether loss suffered by a lender, Mitchell Morgan Nominees, was apportionable between Mitchell Morgan's solicitors, Hunt & Hunt and the persons who had fraudulently obtained a loan.

The Court of Appeal determined that the solicitors were not concurrent wrongdoers with the fraudsters and therefore that the solicitors’ liability could not be apportioned. This decision was based on an analysis of the loss suffered by Mitchell Morgan.

Mortgage fraudulently obtained and fraudsters made bankrupt

Mr Cardonna, with the assistance of a solicitor, Mr Flammia, fraudulently obtained the loan on the security of a mortgage over a property in Enmore by effectively posing as the owner of the property, a Mr Vella. Mr Vella and Mr Cardonna were partners in a joint venture to promote a boxing match and held a joint bank account for that purpose.

The solicitors acted for Mitchell Morgan and drafted the mortgage documents. The fraudsters represented to the solicitors and Mitchell Morgan that Mr Vella had signed mortgage documents in the presence of Mr Cardonna. The mortgage was then registered on 19 January 2006.

Mr Flammia, holding himself out to be Mr Vella's solicitor, directed Mitchell Morgan to pay $1,001,748.85 into the joint bank account held by Mr Cardonna and Mr Vella, which it did upon confirming the mortgage had been registered.

That joint account was emptied and the fraudsters were subsequently made bankrupt. Mitchell Morgan could therefore not recover from the fraudsters and looked instead to the solicitors.

Negligence of solicitor - mortgage indefeasible but secured nothing

The mortgage was held to be indefeasible (that is, it could not be annulled or forfeited) but it was also held to "secure nothing". The mortgage included a condition securing only money owing by Mr Vella to Mitchell Morgan.

As Mr Vella did not owe Mitchell Morgan any money (because of the fraud), nothing was secured. It was held that the solicitors should have drafted the mortgage so that it contained a covenant to pay a stated amount. That stated amount would then have been secured.

It was held that the solicitors were negligent in failing to turn their minds to the risk of fraud.

Concurrent wrongdoers and proportionate liability

The issue before the Court of Appeal was whether the solicitors should have been liable for the "vast majority" of Mitchell Morgan's loss. That is, whether the solicitors were a "concurrent wrongdoer", as defined in Part 4 to mean:

…in relation to a claim, is a person who is one of two or more persons whose acts or omissions (or act or omission) caused, independently of each other or jointly, the damage or loss that is the subject of the claim.

Mitchell Morgan claimed that the damage it had suffered as a result of the solicitors' negligence was the absence of a security over the money lent. Mitchell Morgan argued that the fraudsters did not cause that loss. The Court of Appeal agreed.

Case sets important precedent for legal practitioners

The appeal was unusually heard by a bench of five Justices, which suggests that the Court of Appeal considered the issue of how to determine whether a party is a concurrent wrongdoer under Part 4 to be of crucial importance. The case stands as an important precedent for practitioners.

Giles JA considered that to apply Part 4, the Court needed to consider the nature of the loss. Giles JA looked at established principles of the distinction between "compensation" and a claim for "damage", or "harm" to an economic interest or interest in property.

The distinction is neatly summarised at paragraph 37 of the judgment:

The remedy in an action for damages is judgment for a money sum, whether the claim be one of harm to a personal, proprietary or economic interest. The money sum is compensation for the wrong. But the money sum is not to be equated with the personal proprietary or economic interest for harm to which the damages are awarded.

Loss suffered because money could not be recovered from security

Giles JA held that the loss subject to the claim against the fraudsters was different to the loss claimed against the solicitors. The loss as against the fraudsters was paying out money when Mitchell Morgan would not have otherwise done so.

The loss claimed against the solicitors was not having the benefit of security for the money paid out. As Giles JA said at paragraph 43: "Loss is suffered not because the money was lent, but because it cannot be recovered from the security."

For this reason, the fraudsters did not cause the harm claimed as against the solicitors and the solicitors’ liability could not be apportioned under Part 4.

Apportionment of liability is not a matter of course

In considering whether a party is a "concurrent wrongdoer", practitioners should consider the nature of the damage claimed and its cause. This case turns on its particular facts, but emphasises that apportionment is not a matter of course.

Although it may appear that a concurrent wrongdoer is available, the nature of the loss and damage suffered can mean that a claim cannot be apportioned.

The damage caused as a result of the actions of a fraudster may be different to the loss suffered as a result of the negligence of a professional adviser on the same transaction.