States divided on when the statutory apportionment defence applies

A divide has emerged between NSW and Victorian courts over which claims are ‘apportionable claims’ under statutory proportionate liability regimes. The different interpretations produce very different outcomes for those involved in multi-party disputes.

Three years ago and in a case arising from the fire at Melbourne’s Lacrosse apartment tower, Tanah Merah Vic Pty Ltd v Owners Corp No 1 of PS613436 [2021] VSCA 72 (Lacrosse case), the Victorian Court of Appeal held that plaintiffs could limit the operation of the proportionate liability regime by the way they pleaded their claims. That is, by relying on causes of action not involving a lack of reasonable care (e.g. a breach of a strict contractual warranty), plaintiffs might recover all of their loss from just one defendant, rather than having to pursue the other parties who might have also been responsible. On this view, the proportionate liability regimes permit plaintiffs to ‘plead out’ of the statutory apportionment defence.

The NSW Court of Appeal has very recently cast doubt on the correctness of this approach in Gerrard Toltz Pty Ltd v City Garden Australia Pty Ltd (in liq) (No 2) [2024] NSWCA 232 (Gerrald Tolz), a case concerning a lawyer’s alleged breach of fiduciary duties. In particular, the NSW Court of Appeal disagreed with the proposition that a claimant might effectively evade the proportionate liability regime by its formal court pleadings alone. Two judges writing in obiter emphasised the relevance of the underlying facts – and whether they revealed any failure by the defendant to take reasonable care – in determining which claims are ‘apportionable claims’.

This difference of opinion is important because:

• whether proportionate liability applies – as opposed to joint and several liability – directly affects whether plaintiffs or defendants bear the insolvency risk of any contributing parties, how much a plaintiff can actually recover (and from whom) and whether other parties will ultimately be joined to the proceeding; and
  
  
• it is a matter which may persuade the High Court to grant special leave should an appropriate vehicle arise for it to resolve the controversy between the appellate courts.[1]

Until the controversy is resolved, parties – and plaintiffs in particular – must tread carefully in pleading and proving their claims where it is possible that there may be more than one party responsible for the plaintiff’s loss.

We unpack the relevant issues in more detail below.

A short history of proportionate liability in Australia

At common law, and in Australia generally until this century, it was reasonably uncontroversial that a negligent defendant was liable to a plaintiff alone on a joint and several (or ‘solidary’) basis; it was no defence to say that someone else had been more negligent, or that the blame ought be shared.[2] It also did not much matter, from a recoverability perspective, whether the plaintiff ran its case for ‘breach of contract’ or for ‘negligent breach of contract’.

Joint and several liability favours plaintiffs. When it does apply, and a plaintiff (say, an Owners Corporation, a Principal or a future land owner) holds causes of action against several defendants (say, a D&C Contractor, a Subcontractor and Designer), the well-advised plaintiff brings its action against the defendant with the strongest balance sheet (or the strongest insurance). Even where that defendant is only a partial or even a minor contributor, they are solely liable for 100 per cent of the plaintiff’s loss. The task of ‘apportioning’ that liability was for that defendant to undertake against its co-defendants, with the risks of insolvency, under-recovery and inconsistent outcomes in later proceedings laying where they fell.

The demise of the HIH Insurance Group and a perceived crunch in the availability and pricing of insurance in 2001 heralded the end of this approach. Each jurisdiction enacted statutory ‘proportionate liability’ schemes, which enabled a defendant to share or ‘apportion’ its liability with the other persons responsible, i.e. ‘concurrent wrongdoers’.[3] The common law approach was displaced and the practice of pursuing only the most deep-pocketed defendants was limited. The risk of under-recovery shifted back towards the plaintiff.

Each of the state proportionate liability regimes are distinct, but all share the essential characteristics that:

• where a plaintiff’s claim is for economic loss or damage to property and arises from a ‘failure to take reasonable care’, that claim will be an ‘apportionable claim’;
  
  
• where more than one person has caused the plaintiff’s loss, they are ‘concurrent wrongdoers’;[4] and
  
  
• the liability of any defendant who is a concurrent wrongdoer in respect of an apportionable claim will be capped to the extent they were responsible for the loss in question (as assessed by the court or tribunal).

Where the regimes do apply, plaintiffs pursuing apportionable claims will in most cases need to pursue multiple parties to fully recover their loss. The New South Wales and Victorian appellate courts have diverged on the threshold issue of what is an apportionable claim.

The fire and the alleged defaulting fiduciary – what the cases say

In the Lacrosse case, the plaintiff (an owners corporation) sought to recover losses following the fire that spread across its building because of combustible cladding. We have previously written about the case and relevant findings.

The plaintiff framed its case against the defendant builder around breaches of the contractual warranties implied by the Domestic Building Contracts Act 1995 (Vic). The plaintiff did not advance a case that the builder had ‘failed to take reasonable care’ in installing combustible cladding on a residential tower.[5] The appeal concerned whether the plaintiff’s contractual cause of action, as pleaded, was an ‘apportionable claim’.

Applying Part IVAA of the Wrongs Act 1958 (Vic), the Court of Appeal held that:

• the terms in which a plaintiff chooses to plead its case are an “essential determinant” of whether its claim arises from a failure to take reasonable care;
  
  
• it was not open to a defendant to improve its position by looking behind a plaintiff’s case to show that the claim arose from some failure to take reasonable care, and that the legislation did not permit a defendant to “transform” claims in this manner; and
  
  
• that claims for breach of strict contractual warranties (such as fitness for purpose obligations) could not “logically or semantically” be said to arise from a failure to take reasonable care.

The takeaway following the Lacrosse case was that plaintiffs could evade the operation of the proportionate liability regime through their formal legal pleadings. Deep-pocketed defendants who had contributed to a plaintiff’s loss might be found solely liable even where there were other parties responsible for the plaintiff's loss. The underlying negligence of that defendant and its ‘concurrent wrongdoers’ could, to an extent, be glossed over. Defendants were not to benefit from the ‘anomalous’ consequence that they might improve their legal position by conceding their own negligence.

The NSW Court of Appeal departed from this view in Gerrald Toltz. That case concerned a firm of solicitors alleged to have breached their fiduciary duties by acting in conflict and without its client’s informed consent in a loan transaction. The client sought to recover its economic losses by way of equitable compensation. Relevantly, a claim for breach of the strict ‘conflict rule’ in equity might not involve any pleading that the defendant had been negligent or not careful. Amongst its other defences, the firm sought the benefit of the proportionate liability defence to reduce its liability. While the issue ultimately was not required to be resolved as the solicitors’ appeal was allowed on other grounds, Stern JA and Basten AJA noted separately – and in obiter remarks – that:

• there remained “considerable support at the appellate level”, notwithstanding the Victorian approach, for the view that a court should decide what claims are ‘apportionable claims’ by looking to both of how the plaintiff chooses to frame its claim, but also to the underlying, substantive factual findings which are made (Stern JA); and
  
  
• put even more strongly, that “the definition of apportionable claim turns upon factual findings made in the course of the trial”, and not just the plaintiff’s pleadings (Basten AJA).

Gerrald Toltz only dealt with the proportionate liability regime found in Part 4 of the Civil Liability Act 2002 (NSW). On a strict view, these obiter remarks may not directly inform the interpretation of the counter-part regimes nationwide. However, both Stern JA and Basten AJA appeared to identify the Victorian Lacrosse decision as taking a more restrictive approach to what claims are ‘apportionable claims’ than the statutory language warrants.

Interestingly, the first consequence of the NSW Court of Appeal’s decision appears to have manifested at the trial level in Victoria. On 22 October 2024, the Victorian County Court published reasons identifying “enough uncertainty in the authorities”, including a lack of “binding” authority on it, that it was inappropriate for it to determine whether the claims before it were ‘apportionable claims’ in an interlocutory setting.[6]

Where this leaves those involved in multi-party disputes

This fine legal disagreement over a statutory definition and the role of pleadings has very real practical implications:

• for plaintiffs, because it will be more difficult, on the NSW view, to avoid the operation of the proportionate liability regime even for cases limited to breaches of strict contractual warranties (e.g. fitness for purpose obligations) if the defendant was also negligent (i.e. there was a relevant failure to take reasonable care);
  
  
• for defendants, because while they might deny any breach of these strict contractual warranties with a view to escaping any liability, they might now concede in the alternative that they breached them negligently with a view to escaping some liability via apportionment; and
  
  
• for everyone, because all litigants will need to consider carefully whether they need to pro-actively seek to join, or make available, any potential ‘concurrent wrongdoers’ to claims they are prosecuting or defending. The various state regimes are inconsistent as to which party bears the obligation to join concurrent wrongdoers, and advice should be sought on this point.

The decisions discussed in this Insight confirm the recent trend of proportionate liability becoming an ever more prominent feature of Australian dispute resolution. Gerrald Toltz follows the High Court’s decision earlier this year in Tesseract, which widened the potential availability of the statutory apportionment defence to arbitral respondents. The High Court is currently also reserved in Pafburn, which concerns a further, related controversy over whether actions for breach of the statutory duty of care created by the Design and Building Practitioners Act 2020 (NSW) are also ‘apportionable claims’.

Further judicial intervention in this field is to be expected. In the meantime, the availability of the statutory apportionment defence remains an issue to be carefully navigated for parties about to embark on, or who are currently underway in, litigation or arbitration.

^{[1] See section 35A of the Judiciary Act 1903 (Cth), which sets out the criteria for granting special leave to appeal to the High Court. One matter the High Court will have regard to is whether it is required to resolve differences of opinion between different courts as to the state of the law. The difference of opinion between the Victorian and NSW Courts of Appeal state has already been brought to the attention of the full bench of the High Court in oral argument in the case of Pafburn Pty Limited (ACN 003 485 505) & Anor v The Owners - Strata Plan No 84674 (Pafburn) (15 October 2024).}

^{[2] Some minor exceptions were made for building actions before this time – for example, see the now repealed section 131 of the Building Act 1993 (Vic), which was bluntly titled ‘Limitations on liability of persons jointly or severally liable’.}

^{[3] Similar but different regimes exist in each state and territory: in Victoria, Part IVAA of the Wrongs Act 1958; in New South Wales, Part 4 of the Civil Liability Act 2002; in Queensland, Part 2 of Chapter 2 of the Civil Liability Act 2003; in Western Australia, Part 1F of the Civil Liability Act 2002; in South Australia, Part 3 of the Law Reform (Contributory Negligence and Apportionment of Liability) Act 2001; in Tasmania, Part 9A of the Civil Liability Act 2002; in the ACT, Chapter 7A of the Civil Law (Wrongs) Act 2002; and in the Northern Territory, the whole of the Proportionate Liability Act 2005. At the Commonwealth level, specific regimes exist in respect of misleading or deceptive conduct in each of Part VIA of the Competition and Consumer Act 2010, Division 2A of Part 7.10 of the Corporations Act 2001 and Subdivision GA of Part 2 of Division 2 of the Australian Securities and Investments Commission Act 2001.}

^{[4] While there may be some uncertainty, we think the better view is that, as well as causing the plaintiff’s loss, the concurrent wrongdoer must also be legally liable to the plaintiff; Hunt and Hunt Lawyers v Mitchell Morgan Nominees Pty Ltd (2013) 247 CLR 613, [91].}

^{[5] The plaintiff did not allege that the builder had breached section 8(d) of the Domestic Building Contracts Act 1995 (Vic), which implies a warranty by the builder ‘that the work will be carried out with reasonable care and skill’.}

^{[6] Owners Corporation 1 PS721535N v Team Building (Vic) Pty Ltd & Ors [2024] VCC 1633, [71]-[74].}