Supreme Court decision could increase defence costs for insurers

Insurance Alert

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On 15 March 2016, the Supreme Court released its decision in the Mark Hotchin case, finding an arguable case that Hotchin can claim contribution from Guardian Trust in respect of his $18 million settlement with the Financial Markets Authority (FMA). The settlement was in respect of the collapse of Hanover Finance Ltd in 2008, causing significant loss to investors.

The decision is significant in broadening the requirement that two tortfeasors must be liable to the plaintiff for the 'same damage' to allow one of them to claim contribution from the other. This is both good and bad news for liability insurers depending on the particular case, and may lead to lengthy, more complex, and consequently more expensive proceedings. 

Alleged securities breaches by Hotchin and Guardian Trust 

The FMA brought proceedings against Hotchin as a director of Hanover Finance, alleging that the prospectus distributed by the finance company contained untrue statements. Guardian Trust was the trustee for the Hanover Finance securities. 

Although neither party admitted any liability to the FMA, for the purpose of the strike out application, the Supreme Court analysed the basis of the alleged liability as being: 

  • In respect of Hotchin, breach of a duty owed to investors by making false statements in the prospectus as to Hanover Finance's liquidity position. 
  • In respect of Guardian Trust, breach of a duty owed to investors by failing to monitor the liquidity position of Hanover Finance and take timely and appropriate action in relation to any matters of concern. In other words, it was a 'failure to pull the plug'. 
Requirements for a contribution claim 


Under the Law Reform Act 1936, a tortfeasor liable in tort can claim contribution from another tortfeasor who is 'liable in respect of the same damage'. The courts apportion the damage by determining what is just and equitable having regard to the extent of that person's responsibility for the damage. 

This provision is useful where a plaintiff has a valid claim against two defendants in respect of its loss, but choses to sue only one of them. It allows that defendant to join the other party, so that the liability is shared between the two parties in proportion to their culpability. 

High Court and Court of Appeal 

On the strike out application, the High Court and the Court of Appeal found that Guardian Trust was not liable for the 'same damage' as Hotchin. This was on the basis that the nature of Guardian Trust's liability was different: 

  • Hotchin was allegedly liable for making untrue statements in the prospectus. 
  • In contrast, Guardian Trust was allegedly liable for its failure to adequately monitor the liquidity position of Hanover Finance, which ought to have caused it to 'pull the plug' at an earlier stage. 
Although the consequences of those breaches for investors were largely the same (ie a loss of their investments), this was not sufficient to fulfil the 'same damage' requirement, as there was no common or shared obligation. 

Supreme Court 

In a 3:2 decision, the Supreme Court overturned the lower courts and held that Hotchin and Guardian Trust's alleged liability was in respect of the 'same damage'. As a result, Hotchin could claim contribution at trial, subject to overcoming a number of other (significant) hurdles to his claim. 

The Supreme Court's rationale was that the claim against Hotchin and the claim against Guardian Trust are both in respect of the same loss (ie the loss in value of investments). The relevant inquiry is whether the harm allegedly caused by the two tortfeasors is, in substance, the same. 

Taking a broad and pragmatic approach, the Supreme Court considered it would be artificial to prevent a defendant from joining a third party who is also liable to the plaintiff, on the ground that the legal source and nature of their liability is not identical. In other words, there is no requirement that the liability is in respect of the same duty, or that the two tortfeasors are liable in the same way. 

It is worth noting the strong dissent from two of the Supreme Court judges who supported the approach taken in both the High Court and the Court of Appeal. In the circumstances, academic criticism of the majority's broadened and simplified approach to contribution claims is likely. 

Implications 

This is good news for liability insurers of defendants who want to bring a third party into proceedings to share the burden of the claim. The decision reduces the potential for plaintiffs to arbitrarily create a situation where one defendant has to shoulder the entire burden. It can also make settlement more likely by providing another (potentially deep) pocket. Taking the facts of the Hotchin case as an example, directors & officers liability insurers may welcome the decision for making it easier to join trustees to the claim. 

However, as the Supreme Court itself recognised, its approach gives much more scope for contribution claims that might otherwise have been struck out at an early stage. Multi-party proceedings are invariably more complex and lengthy, resulting in increased costs for all parties. Third parties may be dragged into defending proceedings lasting for many years, even in cases where the contribution claim against them is remote and unmeritorious. 

If you have any questions, or require further information regarding any aspect of this publication, please contact us.

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