The Advisee Enforces the Induced Contract

This section considers the allocation of liability in cases in which the advisee seeks payment of a contractual debt or damages for breach of contract from the contract-partner. The circumstances discussed are as follows.

The discussion of this category proceeds in three steps. First, I critically inves­tigate the way in which the advisor's liability towards the advisee is and should be measured, ignoring for the moment the possible impact of a proportionate liabil­ity regime. Secondly, I investigate the way in which liability is and should be allo­cated between the advisor and the contract-partner under a regime of joint and several liability. The third and final step is to examine the impact on this allocation of the proportionate liability regime that exists in Australia.

A. Measuring the Advisor’s Liability Towards the Advisee

Two different measures of the advisor’s liability towards the advisee have been adopted in the cases. The first measure is the difference between the value of eve­rything the advisee has given away under the induced contract and the value of everything she has obtained under that contract, including the value of her out­standing claim against the contract-partner. Thus, the fact that the contract-partner is contractually liable towards the advisee reduces the advisor’ s liability towards the advisee (unless it is certain that nothing can be obtained from the contract­partner). The advisor must pay compensation only if, and to the extent that, the advisee’s claim against the contract-partner is valued at less than its nominal amount because, for example, the contract-partner is insolvent or has absconded (and is not insured). Essentially, the advisor is liable only for the amount (if any) that the advisee is expected to be unable to recoup from the contract-partner.^[1008]

The other measure of the advisor’s liability towards the advisee adopted in the cases is the difference between the value of everything the advisee has given away under the induced contract and the value of assets (other than the claim against the contract-partner) the advisee has obtained under that contract. By ignoring the value of the advisee’s contractual rights against the contract-partner in meas­uring the advisor’s liability towards the advisee, this approach yields a higher liability for the advisor than the first measure, the increase in the advisor’s liability corresponding to the value of those rights.

Consider the following example. After a property has been sold for $500,000 and the purchaser paid the purchase price, it turns out that the vendor lacks title to the property. Comparable properties are available for $500,000. The purchaser is entitled to contractual damages in the amount of $500,000 from the vendor,^[1009] but the vendor has yet to pay.

The amount of the solicitor's liability is straightforward under the second measure mentioned before: it is always $500,000.47 By contrast, the amount of the solicitor's liability under the first measure depends upon the estimated value of the purchaser's damages claim against the vendor. If it is certain that nothing can be obtained from the vendor (because, for example, the vendor is insolvent), the solicitor will be liable in the amount of $500,000. If it is estimated that, say, $300,000 can be obtained from the vendor, the solicitor will be liable in the amount of $200,000. If it is certain that $500,000 can be obtained from the vendor, the solicitor will not be liable at all. The amount of the solicitor's liability and the amount that it is estimated can be obtained from the vendor always add up to $500,000.

The courts have not applied the same measure of the advisor's liability in all cases. The first measure has been applied in most cases in which a lender granted a loan to a borrower in reliance on a valuer's negligent overvaluation of the security for the loan. In those cases, the value of the lender's outstanding claim against the borrower was taken into account in measuring the valuer's liability towards the lender. Lord Nicholls, with whom all other Law Lords agreed, said in Nykredit Mortgage Bank plc v Edward Erdman Group Ltd (No 2):

[I]n the case of a negligent valuation of an intended loan security, the basic comparison called for is between (a) the amount of money lent by the plaintiff, which he would still have had in the absence of the loan transaction, plus interest at a proper rate, and (b) the value of the rights acquired, namely the borrower's covenant and the true value of the overvalued property.^{[1010] [1011]}

By contrast, the second measure of the advisor's liability has tended to be applied in cases in which the advisee purchased or sold an asset.

The cases mentioned demonstrate that the courts have tended to take the value of the advisee's claim against the contract-partner into account where that claim is one in debt, but not where it is a claim in damages.^[1017] But not all cases fit into that pattern. Moreover, there is no reason why the measure of the advisor's liabil­ity ought to differ according to the type of claim made by the advisee against her contract-partner, or the type of assets given away by the advisee, or the type of contract. It ought to be the same in all cases. Since the measure of the advisor's liability affects the ultimate allocation of liability, at least on a practical level, it is now appropriate to consider which measure is preferable on principle.

The practical difference between the two measures is that if one takes the first approach, the advisee must pursue a claim against the contract-partner in order to obtain full compensation, whereas the second approach allows the advisee to seek full compensation from the advisor and leave it to the latter to seek contribu­tion or reimbursement from the contract-partner.

An additional, practical problem with the first approach is that if the advisee seeks compensation from the advisor first, the court must guess how much money the advisee will in practice be able to obtain from the contract-partner, who may subsequently turn out to be able to pay less than expected.^[1018] In that case, the ‘once and for all’ rule will prevent the advisee from seeking ‘ top up' damages from the advisor.^[1019] The courts have recognised this problem but their response has simply been to say that unsatisfied claims have to be valued in other circumstances too.^[1020] True, a valuation of unsatisfied claims cannot always be avoided. But the point is that it can easily be avoided in the present context by using the second approach, not the first. If the advisee is always permitted to claim full compensation from the advisor, the amount that the contract-partner is practically able to pay will be clear when the advisor seeks contribution or reimbursement, and the guesswork is removed from the process.

B. Allocation of Liability Under a Regime

of Joint and Several Liability

I now consider the way in which liability is and should be allocated between the advisor and the contract-partner under a regime of joint and several liability. Under such a regime, the advisee can claim full compensation from either wrong­doer, as long as there is no double recovery.

Courts in several jurisdictions have considered whether the advisor and the contract-partner are liable in respect of ‘the same damage’ for the purpose of a contribution statute.^[1021] An affirmative answer has been given by courts in the United Kingdom in cases in which the advisee purchased an asset.^[1022] A negative answer has been given by the English Court of Appeal^[1023] and the Victorian Court of Appeal^[1024] in cases in which lenders granted loans to borrowers in reliance on valu­ers’ negligent overvaluations of the loan securities. Neither Court expressed a view on whether one wrongdoer is entitled to be reimbursed by the other.

Judicial disagreement on the availability of contribution in the present context is illustrated by Marlborough District Council v Altimarloch Joint Venture Ltd.^[1025] Prior to entering into the contract of sale, a purchaser of land was incorrectly advised by the local council that the vendor held certain water rights included in the sale. The vendor was liable for breach of contract,^[1026] and the council liable in negligence. Three of the five judges in the Supreme Court of New Zealand rejected claims for contribution or reimbursement between the council and the vendor,^[1027] while the minority favoured equitable contribution between the two wrongdoers.^[1028]

It seems that the applicability of a contribution statute is generally recognised where the advisee's claim against the contract-partner is one for damages, but not where it is a claim in debt.^[1029] However, there is no reason why the type of claim should matter,^[1030] assuming that the relevant contribution statute can apply to claims in debt at all.^[1031] The availability of contribution or reimbursement must depend upon whether the two wrongdoers, as between them, are ‘of equal rank', in which case a mutual right to contribution exists, or whether one of them is primarily, and the other secondarily, liable for the whole of the common liability, in which case the wrongdoer who is secondarily liable has a right to be reimbursed by the other wrongdoer. This in turn depends upon the nature and rationale of each wrongdoer's liability.

The advisee's contract-partner voluntarily undertook an obligation towards the advisee. It is irrelevant to that obligation that the advisee was wrongfully induced to enter into the contract by incorrect information from the advisor, who is not privy to the contract. There is no reason why performance of the induced contract by the contract-partner, including payment of damages for breach of contract, should entitle him to claim anything from the advisor.

By contrast, the advisor's liability towards the advisee cannot meaningfully be described without reference to the contract-partner's contractual obligations towards the advisee and a possible breach of them. The advisor is liable for expos­ing the advisee to the risk of the contract-partner failing to perform properly, and must indemnify the advisee for loss suffered if the risk materialises. The advisor's obligation is akin to that of a guarantor, who is entitled to be reimbursed by the principal debtor, or an indemnity insurer, who is entitled to be subrogated to the insured's subsisting claim against the person causing the damage. As between the two wrongdoers, the nature and rationale of their obligations invariably render the contract-partner primarily—and the advisor secondarily—liable for the whole of the common obligation.^[1032]

Indeed, the idea that the contract-partner is primarily liable tacitly stands behind the first measure of the advisor's liability towards the advisee, under which the advisor is liable only for the amount not recoverable from the contract-partner. While I argued earlier that the advisor's liability towards the advisee should not be reduced by the value of the advisee's claim against the contract-partner, the even­tual outcome produced by the first approach is appropriate. The same eventual outcome ought to be reached if the advisor's liability is not reduced by the value of the advisee's claim against the contract-partner. The question of deduction, while of practical significance, is a technical question of lower order. It should not affect the answer to the first-order question of who should ultimately bear liability. Even under the second measure of the advisor's liability, recoveries between the three parties should eventually lead to the outcome that the advisor bears liability only for the amount not recoverable from the contract-partner.

It follows that the contract-partner should never be entitled to claim contribu­tion or reimbursement from the advisor.^[1033] The best way of achieving this out­come in the presence of a contribution statute is to interpret the statute so as to be inapplicable in the present context. It might be thought that an allocation of shares of nil and 100 per cent under a contribution statute would produce the same out­come. However, this would be problematic, for three reasons. First, the application of a contribution statute would create the danger that contribution shares other than nil and 100 per cent might incorrectly be allocated in some cases. Secondly, in cases in which the advisee has sued only the contract-partner, the applicability of a contribution statute would permit the latter to join the advisor as a third party, since such a joinder requires only the availability of contribution in principle.^[1034] Thirdly, the applicability of a contribution statute in certain circumstances under a regime of joint and several liability may affect the applicability of a proportion­ate liability statute in the same circumstances. This will be discussed further below.

It can now be finalised how liability ought to be allocated under the two meas­ures of the advisor's liability. If, as I have argued is the appropriate course, the advisor's liability towards the advisee is not reduced by the value of the advisee's claim against the contract-partner, payment by either wrongdoer to the advisee will discharge both wrongdoers' liabilities, to the extent of ‘overlap'. This prevents double recovery by the advisee.^[1035] If the contract-partner pays, he ought to have no claim for contribution or reimbursement against the advisor because the contract­partner's liability is primary. If the advisor pays, he should, as someone whose liability is merely secondary, have a right to be reimbursed by the contract-partner. This right to reimbursement should be accompanied by the advisor being subro­gated, to the extent of his payment, to the advisee's extinguished claim against the contract-partner.

If, contrary to the view I have expressed, the advisor's liability towards the advi­see is reduced by the value of the advisee's claim against the contract-partner, then performance or payment of damages by the contract-partner will not discharge the advisor's liability towards the advisee, and the contract-partner will have no claim for contribution or reimbursement against the advisor. If the advisor pays damages to the advisee, it is usually pointless for the advisor to pursue a claim for reimbursement against the contract-partner since the advisor is liable only for the amount thought to be irrecoverable from the contract-partner. However, the contract-partner may turn out to be able to pay more than initially anticipated. If, in such a case, the advisee in fact recovers more from the contract-partner than was anticipated when the advisor's liability was calculated, then the excess ought to end up in the advisor's pocket, according to the policy considerations discussed before. The way of achieving this depends upon whether payment by the advisor is thought to discharge—to the extent of that payment—the contract-partner's obligation towards the advisee.

If such a discharge is thought to occur, the advisor ought to be entitled to claim reimbursement from the contract-partner. However, this claim ought to be regarded as subordinate to the advisee's claim against the contract-partner, since the advisee would not obtain full compensation were her claim to compete with the advisor's reimbursement claim.^[1036] If payment by the advisor is thought not to discharge any part of the contract-partner's obligation towards the advisee, the advisee will remain entitled to attempt to recover the supposedly irrecov­erable part of her claim against the contract-partner.^[1037] Any amount actually recovered by the advisee ought to be held on trust for the advisor. This solution was endorsed by Scott VC in the English Court of Appeal in Howkins & Harrison (a firm) v Tyler.^[1038]

C. Allocation of Liability Under a Proportionate

Liability Regime

I now consider how the proportionate liability regime that exists in Australia does and should impact upon the principles discussed so far. In cases not involving personal injury, proportionate liability of concurrent wrongdoers liable for the same indivisible harm is prescribed by Australian federal statutes prohibiting mis­leading or deceptive conduct in trade or commerce,^[1039] and by statutes in every Australian state and territory in certain circumstances.^[1040] The statutes of the states and territories differ in relation to the wrongs to which they apply.^[1041] It is only necessary here to look at the types of wrong relevant in the present context.

The wrong committed by the advisor against the advisee will usually be neg­ligence, often concurrent with the breach of a contractual duty of care. It may alternatively be deceit, and a fraudulent or negligent misstatement may constitute misleading or deceptive conduct prohibited by statute. The proportionate liability statutes of all states and territories apply to a claim for damages for the breach of a contractual or tortious duty of care,^[1042] and most statutes also apply to misleading or deceptive conduct in trade or commerce.^[1043] None of the statutes limits the liabil­ity of a concurrent wrongdoer who fraudulently caused the plaintiff's damage,^[1044] or intended to cause the plaintiff's damage.^[1045] Thus, the statutes of all states and territories apply to the advisor's wrong if, and only if, the advisor did not intend to harm the advisee. The following discussion assumes the absence of such intention.

The wrong committed by the advisee's contract-partner is a breach of contract. If it is the breach of a contractual duty of care, it will be subject to proportion­ate liability, as just mentioned. But it will usually be strict contractual liability, which is contractual liability not dependent upon fault. No Australian proportion­ate liability statue applies to the liability of an innocent contract-breaker. Where a contract-breaker liable irrespective of fault was in fact at fault, the statutes of Queensland^[1046] and South Australia^[1047] are still inapplicable and it is unclear whether the statutes of the other jurisdictions apply.^[1048] On principle, they should not, since it would be absurd if a contract-breaker's culpability reduced liability.^[1049] It follows that the advisee's claim against her contract-partner will rarely be subject to pro­portionate liability. The following discussion thus focuses on the advisee's claim against the advisor.

The impact of a proportionate liability regime in the circumstances under dis­cussion was considered by the Victorian Court of Appeal in St George Bank Ltd v Quinerts Pty Ltd.^[1050] A bank lent $640,000 to the purchaser of an apartment, secured by mortgage over the property. The bank was relying on a valuer's statement that the value of the property was $800,000. The borrower and his guarantor defaulted on the loan and went into bankruptcy. A sale of the property by the bank realised $495,000. It turned out that the valuer had been negligent, the true value of the property at the time of the valuation being only $500,000. The bank claimed dam­ages in the amount of $145,000 from the valuer, this being the difference between the amount lent and the proceeds of the sale of the property. The valuer argued that its liability was limited by Part IVAA of the Wrongs Act 1958 (Vic), which prescribes proportionate liability in certain circumstances, because the borrower and the guarantor were concurrent wrongdoers with the valuer.^[1051]

The Victorian Court of Appeal rejected that argument. Nettle JA, who spoke for the Court, reasoned as follows. Part IVAA was intended to put a defendant in exactly the same position as if all other concurrent wrongdoers liable to make contribution under section 23B of the Act were before the Court and of sufficient means to make contribution.^[1052] ‘ Loss or damage that is the subject of the claim' in Part IVAA has the same meaning as ‘the same damage' in section 23B.^[1053] The borrower and the guarantor were not liable in respect of ‘the same damage' as the valuer for the purpose of section 23B,^[1054] and were not concurrent wrongdoers with the valuer for the purpose of Part IVAA.^[1055] Nettle JA explained:

The loss or damage caused by the borrower and the guarantor was their failure to repay the loan. Nothing which [the valuer] did or failed to do caused the borrower or the lender to fail to repay the loan. The damage caused by [the valuer] was to cause the bank to accept inadequate security from which to recover the amount of the loan. Nothing which the borrower or the lender did or failed to do caused the bank to accept inadequate security for the loan.^[1056]

Another decision to consider is that by the High Court of Australia in Hunt & Hunt Lawyers v Mitchell Morgan Nominees Pty Ltd,^[1057] which concerned propor­tionate liability pursuant to Part 4 of the Civil Liability Act 2002 (NSW). The case did not involve the circumstances now under discussion and will be discussed in more detail below. However, the High Court commented upon Nettle JA's reason­ing in Quinerts. Bell and Gageler JJ in the High Court agreed with that reasoning,^[1058] but the majority did not. After citing the passage from Nettle JA's judgment quoted in the previous paragraph, French CJ, Hayne and Kiefel JJ observed:

In the passage quoted, his Honour tests the damage so identified by reference to causa­tion. In doing so his Honour appears to have assumed that there is some requirement that one wrongdoer contribute to the wrongful actions of the other wrongdoer in order that they cause the same damage. There is no such requirement in Pt 4 of the Civil Liabil­ity Act. To the contrary, Pt 4 acknowledges, as does the common law, that a wrongdoer's acts may be independent of those of another wrongdoer yet cause the same damage.^[1059]

This criticism of Nettle JA's reasoning has some force. Nettle JA chose narrow descriptions of the damage caused by the borrower and the damage caused by the valuer. If the damage suffered by the bank is described more broadly as the loss of part of the money lent, the borrower and the valuer may well be considered liable for the same damage. It must therefore be asked which description of the bank's damage is preferable. The answer should not depend simply upon factual causation. It should depend upon policy considerations.^[1060] Those will now be examined.

It shall first be assumed (contrary to what said in Quinerts and endorsed earlier in this paper) that, in the absence of a proportionate liability regime, a mutual right to contribution may in principle exist between the contract-partner (the borrower in Quinerts) and the advisor (the valuer in Quinerts). On that assump­tion, there can be no doubt that proportionate liability legislation (if applicable) reduces the advisor's liability towards the advisee. An important effect of the Australian proportionate liability statues is to obviate the need for contribution between concurrent wrongdoers by reducing each wrongdoer's liability towards the victim to a proportion of the damage.

It shall now be assumed (in line with what was said in Quinerts and endorsed earlier in this chapter) that, in the absence of a proportionate liability regime, the contract-partner is primarily, and the advisor secondarily, liable towards the advisee. On that assumption, the application of a proportionate liability regime is problematic. The proportionate liability statutes exclude a right to contribution or reimbursement between concurrent wrongdoers who are each liable for only a proportion of the victim's damage.^[1061] Thus, in the rare event that the proportion­ate liability regime applies to the contract-partner's wrong too,^[1062] the advisor is not allowed to attempt to recover his share of the advisee's loss from the contract­partner. Where the contract-partner is solvent, the proportionate liability regime (if it applies to the contract-partner's breach of contract) thus deprives the advisor of the reimbursement that he would otherwise obtain from the contract-partner. In these (rare) circumstances, the advisor is disadvantaged by a regime that has been enacted for the benefit of wrongdoers.^[1063]

Furthermore, it is unclear how the advisee's loss should be apportioned between the two wrongdoers. The proportionate liability statutes provide that the share borne by a concurrent wrongdoer is what the court thinks just, having regard to the wrongdoer's ‘responsibility' for the damage.^[1064] The courts have determined a wrongdoer's ‘responsibility' in this context in the same way as under a contribution statute, namely by considering the relative degree of departure from the standard of reasonable conduct and the relative causal potency of the conduct.^[1065] In the present context, the shares to be borne by the wrongdoers in the absence of a pro­portionate liability regime should always be nil for the advisor and 100 per cent for the contract-partner. If these figures were applied under a proportionate liabil­ity regime, the advisor's share would always be nil. But the proportionate liability statutes cannot have been intended to render advisors free from any liability in the present context.

It has been suggested that the advisor's share under a proportionate liability regime should always be set at 100 per cent.^[1066] This is a workable solution where the type of wrong committed by the contract-partner does not fall within the scope of the relevant proportionate liability statute. In the rare event that it does fall within that scope, a decision to set the advisor's share at 100 per cent means that the contract-partner's share is nil, and the contract-partner is neither liable towards the advisee, nor obliged to reimburse the advisor. But the proportionate liability statutes cannot have been intended to render the contract-partner free from any liability towards the advisee. In the absence of appropriate criteria yield­ing shares other than nil and 100 per cent, the two wrongdoers would have to bear equal shares. This would be awkward.

Consequently, wrongdoers should not be regarded as ‘concurrent' for the purpose of a proportionate liability statute unless a right to contribution would in principle exist between them in the absence of proportionate liability.^[1067] In that respect, the decision by the Victorian Court of Appeal in Quinerts is correct on principle and was not disapproved by the majority in the High Court in Hunt & Hunt Lawyers, who left that issue open.^[1068] As argued earlier in this chapter, the decision in Quinerts was also correct on principle in holding that no right to contribution exists between the borrower and the valuer in the absence of a proportionate liability regime. This issue too was left open by the majority in Hunt & Hunt Lawyers. While, as men­tioned before, the reason given by the Victorian Court of Appeal in Quinerts for its denial of contribution was dubious, the outcome was correct: the advisor (the valuer in Quinerts) ought to be liable for the whole of the advisee's loss, even if the type of wrong committed by the advisor falls within the scope of a proportionate liability statute.^[1069] Since the High Court in Hunt & Hunt Lawyers stopped short of describing the outcome in Quinerts as wrong,^[1070] Quinerts is still good authority in the circumstances under discussion^[1071] and ought to be followed.

IV.