The New South Wales Court of Appeal has signalled, though not finally decided, that the proportionate liability regime under Part 4 of the Civil Liability Act 2002 (NSW) (the Act) will not apply to cases involving knowing receipt of property transferred in breach of a fiduciary duty.
The Court of Appeal commented that Appellant’s liability arose because she participated in share transfers knowing they constituted breaches of fiduciary duty, rather than liability “arising out of a failure to take reasonable care”. The Court highlighted that a failure to take reasonable care is a critical element required before the proportionate liability regime under section 34(1), Part 4 of the Act will apply allowing defendants to argue that any damages awarded to the plaintiff ought to be apportioned between concurrent wrongdoers.
Background
To set the scene, Cassegrain v Cassegrain [2016] NSWCA 71 (Cassegrain) is the latest judgment to emerge out of the long-running dispute involving a transfer of shares in the Cassegrain family business at a significant undervalue from certain family members to other family members, including the Appellant, Felicity Cassegrain.
The trial judge held that Felicity’s husband, as well as her father, had committed breaches of their fiduciary duties by transferring shares in the family business to Felicity and that Felicity was involved in those breaches. All three defendants were found to be jointly and severally liable to pay equitable compensation to the plaintiffs.
Appeal
On appeal, Felicity argued for the first time, that the trial judge erred in failing to apply Part 4 of the Act to apportion responsibility for the loss between the concurrent wrongdoers; namely Felicity on the one hand and her husband and father on the other hand.
Part 4 of the Act will apply to “a claim for economic loss or damage to property in an action for damages (whether in contract, tort, or otherwise) arising from a failure to take reasonable care, but not including any claim arising out of personal injury” (section 34(1)(a)).
The failure to argue proportionate liability before the trial judge was fatal to Felicity’s appeal. While the majority of the Court of Appeal (Emmett AJA, with Sackville AJA in agreement) disposed of the appeal on this procedural point, the Court did consider whether Part 4 of the Act applied in these circumstances. The Court expressed the view that it was difficult to see how proportionate liability applied because Felicity’s liability did not arise from a “failure to take reasonable care” as required under section 34(1). Rather, Felicity’s liability arose because she accepted the transfer of shares knowing that the transfer constituted breaches of fiduciary duty by the other defendants.
Of note, the Court commented that if the Court had made an order apportioning the damages between the defendants, then Emmett AJA would have been disposed to vary the costs order, on a proportionate basis.
Basten JA, who delivered the minority judgment, agreed that liability arising out of the knowing receipt of property in breach of a fiduciary duty was not an apportionable claim. His Honour determined the Appeal solely under Part 4 of the Act, commenting that the procedural issues which troubled the majority could be set to one side.
Basten JA’s analysis of requirements before damages may be apportioned under section 34(1) is instructive as to how the Court of Appeal may decide future cases, and signals how insurers may need to approach their consideration of whether proportionate liability will apply to claims.
From Basten JA’s analysis we distil the following points:
- How a cause of action is formulated is not significant. However, the relief claimed by a plaintiff must include an order for the payment of damages and those damages must involve compensation for economic loss or damage to property [16];
- The question then is whether the plaintiff’s claim for economic loss arose out of “a failure to take reasonable care.” The pleaded cause of action must have a failure to take reasonable care as an essential element. Alternatively, it will be sufficient that the defendant’s conduct was found by the Court, in fact, to have involved a failure to take reasonable care [18];
- A “failure to take reasonable care” may be contrasted to strict liability and intentional misconduct. Such liability does not require a failure to take reasonable care, unlike negligence which is always expressed in terms of a duty to take reasonable care [22]; and
- Basten JA, in referring to ‘strict liability’, noted the ‘strenuous debate’ in the literature as to whether authorities have correctly determined the application of Part 4 of the Act to claims involving strict liability which also involve a ‘failure to take reasonable care’. If liability was not apportioned, then, it has been hypothesised that defendants will be driven to plead their own negligence. This could lead to completely anomalous results [20].
Basten JA considered that the basis of Felicity’s liability was not a failure to take reasonable care. Instead, her liability arose because she received property with knowledge of the circumstances in which it was conveyed and which told of impropriety. A failure to enquire as to the circumstances of the transaction (a feature of a failure to take reasonable care) was not an element of the Appellant’s liability. Accordingly, Felicity was not entitled to rely on the proportionate liability regime to apportion the damages awarded between herself, her husband and her father. All three defendants remained jointly and severally liable.
To similar effect were comments by Sackville AJA in relation to section 34A of the Act which excludes, from operation of the Act, the actions of “concurrent wrongdoers” which are “intended to cause harm” or are “fraudulent” which actions necessarily entail that they are deliberate.
While the Court of Appeal’s comments are obiter, the Court has clearly signalled that Part 4 of the Act does not apply to cases involving a knowing breach of a fiduciary duty. Before seeking to rely on Part 4 of the Act in order to apportion any damages award, insurers will need to be comfortable that the plaintiff’s claim arises out of a failure to take reasonable care.
This article was written by Christopher Brierley, Partner and Anita Wear, Senior Associate.