This article considers a key aspect of a recent court decision and discusses the implications for plaintiffs who settle with individual defendants in multi-party litigation in the equity division.
Plaintiffs who wish to settle a claim seeking equitable relief against only certain defendants can do so confident that any release will not operate as a release of other defendants.
The previously “vexed” question of whether settlement with a defaulting fiduciary, such as breaches of director’s duties, or accessories to such a breach operates as a release of all, has been answered in the decision of Ward CJ in Equity in In the matters of Earth Civil Australia Pty Ltd, RCG CBD Pty Ltd, Bluemine Pty Ltd, Diamondwish Pty Ltd and Rackforce Pty Ltd (all in Liquidation) [2021] NSWSC 966 (Earth Civil Cases), in which CMN acted for the plaintiffs.
Ward CJ’s decision clarifies the position for plaintiffs who settle proceedings against multiple defendants in the equity division, particularly following the decision of Stevenson J in Edgewater Homes Pty ltd v Donohoe [2019] NSWSC 44 (Edgewater Homes).
The Earth Civil Cases
The plaintiffs brought claims against a group of accountants from the accounting firm BANQ Accountants and Advisors and their clients for, amongst other claims, breaches of director’s duties to the plaintiff companies and accessorial liability to those breaches.
During the course of the approximately 4 years from the commencement of the Earth Civil Cases in 2016 to the hearing commencing in February 2020, the plaintiffs negotiated settlements and releases with multiple defendants.
What were the arguments on release in the Earth Civil Cases?
At the hearing of the Earth Civil Cases, the defendants contended that they had been released (due to the settlement and release of various defendants), invoking Edgewater Homes and Yeshiva v Marshall (in relation to the non-pursuit or abandonment of the claims against a defaulting fiduciary).
The plaintiffs submitted that:
- the joint release rule does not apply to claims as between defaulting fiduciaries/knowing assistants and that liability is several only;
- there is no established exception to the joint release rule where parties are acting in concert (the statement in Grimaldi v Chameleon Mining being obiter) and the defendants had not pleaded the necessary facts to enliven the exception;
- the release rule has been impliedly abrogated by section 95 of the Civil Procedure Act 2005 (NSW);
- the common law rule should not be followed in Equity; and
- the release rule in equity would be contrary to public policy (including that it would inhibit early resolution of disputes outside of court).
The Earth Civil Cases outcome
Her Honour largely accepted the plaintiffs’ submissions and held as follows:
- In Australia the liability of a defaulting fiduciary and accessory to account for profits, equitable compensation and in relation to loss based is remedies is several only subject to the two exceptions in Grimaldi v Chameleon Mining.
- The Grimaldi exception of acting in concert for a mutual benefit was applicable in the Earth Civil Cases.
- The release of a defaulting fiduciary or accessory does not have the effect of releasing the other because section 95 of the Civil Procedure Act 2005 (NSW) has impliedly abrogated the release rule in that the concept of an indivisible cause of action is gone, including as between a defaulting fiduciary and knowing assistant, and with it any application of the release rule.
- Even if it is not impliedly abrogated by s95, the ‘joint release rule’ has no application in equity. The release rule (which is derived from the unity of cause of action against joint debtors and tortfeasors) should not be followed in courts of equity. Her Honour noted that this was not raised before Stevenson J in Edgewater Homes.
- Settlements arguably facilitate the “just, quick and cheap” resolution of a dispute and should not be deterred for fear that the remaining wrongdoers can no longer be pursued in court.
The importance of the Earth Civil Cases decision for settlements in equity
The ability to achieve a commercial resolution of claims outside of court is an important aspect of dispute resolution and litigation.
Her Honour’s decision in the Earth Civil Cases means that where plaintiffs commence proceedings seeking equitable relief against multiple defendants, they can settle with and release individual defendants without also releasing the remaining defendants. This allows settlements to remain an integral part of the litigation process.
The Earth Civil Cases and the outcome show CMN’s expertise in large scale and complex litigation. Our Insolvency and Litigation lawyers advise and represent parties in a vast array of disputes – from routine, small claims through to significant insolvency and corporate law cases.
If you think you have a claim or wish to defend one, please call us for a confidential discussion.