Proportionate Liability: to contract out or to not contract out?

While it is often far from front of mind, the pandora’s box that is the proportionate liability regime is a factor worth paying some attention to during construction contract negotiations.

Before the introduction of the proportionate liability schemes, in an action for recovery of monies due to defective construction work, the default position was that:

• the injured party may pursue any of the multiple wrongdoers for the entirety of the loss; and
• each wrongdoer may be joint and severally liable (i.e. liable for the entirety of the loss).

Since the introduction of the schemes, this position has changed.

Now, if the proportionate liability scheme applies to your contract, a concurrent wrongdoer’s (that is, one of 2 or more contributors to particular loss) liability is typically limited to an amount that is proportionate to their responsibility for the loss or damage. 

What is your role under the construction contract?

This leads to opposing negotiating points when preparing contracts.

Principals and head contractors want to try and maximise the amount of any claim they might bring downstream.

Subcontractors want to minimise their exposure to potential claims involving multiple parties.

Put another way: principals want to contract out of the proportionate liability scheme if possible, and subcontractors don’t.

FOR A PRINCIPAL

For the principal, your ideal goal is to contract out of the proportionate liability scheme.

Achieving this goal provides the following benefits:

• you are only required to sue one of the wrongdoing parties for the entirety of the loss;
• in light of (a) above, you may be able to strategically choose which wrongdoer to sue (allowing some room for commercial considerations e.g. ongoing commercial relationships); and
• any apportionment of liability becomes the defendant’s issue by way of seeking contribution from the other wrongdoers.

FOR A CONTRACTOR

For the contractor, your goal is typically to remove and/or amend any indemnity or contractual clause that seeks to alter the position under the proportionate liability scheme.

Achieving this goal provides the following benefits:

• your liability as a concurrent wrongdoer is limited to an amount proportionate to your responsibility for the damage or loss, and judgment against you must not be for more than that amount;
• the court may have regard to the comparative responsibility of any concurrent wrongdoer despite not being party to the proceedings (section 35(3)(b)); and
• you cannot be required to contribute to any damage or contribution recovered from another concurrent wrongdoer (section 36).

If despite your best-efforts during contract negotiations, you are unable to remove and/or amend any clause that may result in the proportionate liability scheme not applying, you may still be able to manage your risk.

In these circumstances, it is important to ensure your downstream contracts with others provide ample opportunity to claim anything you may be found liable for under your contract with the principal.

Just because you may be required to pay something to a principal due to an act or omission by your subcontractor, does not mean that you are prevented from in turn seeking to recover that payment from the subcontractor.

But can you even contract out?

Just because your goal as a Principal might be to contract out of the proportionate liability scheme, does that necessarily mean that you can?

Not always.

To provide the cleanest comparison between states, we focus on the QLD and NSW proportionate liability schemes below.

Civil Liability Act 2003 (Qld)

For our QLD readers, the proportionate liability scheme cannot be contracted out of.

Relevantly, section 7(3) of the Civil Liability Act 2003 (Qld) expressly prohibits parties contracting out of chapter 2 part 2 of the Act (i.e. proportionate liability).

This offers an interesting issue. Generally, “indemnity” clauses in contracts are not affected by proportionate liability schemes. That means if you are sued under an “indemnity” clause, the scheme does not necessarily apply.

So does this mean that every indemnity provision in a contract is effectively “contracting out” and therefore unenforceable?

The answer to that, at this stage is, no.

That said, it is currently undecided by the courts as to whether indemnities offend the proportionate liability scheme unlawfully (and therefore may not operate). However, until it is decided, relevant indemnities to protect your position should still be sought.

Civil Liability Act 2002 (NSW)

In contrast, for NSW the proportionate liability scheme can be contracted out of.

Specifically, section 3A(2) of the Civil Liability Act 2002 (NSW) expressly allows parties to contract out of Part 4 (i.e. proportionate liability).

So, where to from here?

The proportionate liability decision tree

Are you a principal? If so:

1. your goal is to contract out of the proportionate liability scheme ;
2. determine if contracting out is a lawful possibility;
3. if it is, attempt to do so in contract negotiations; and
4. either way, endeavour to maximise indemnity provisions in your contract.

Are you a subcontractor? If so:

1. your goal is to avoid contracting out of the proportionate liability scheme if possible;
2. if you are in Queensland, then you are fairly safe because contracting out of the scheme is not lawful;
3. if you are in NSW, check the contract carefully to ensure that there is nothing seeking to avoid the scheme. If you are elsewhere, get some advice on the scheme as it operates in your State or Territory; and
4. either way, endeavour to minimise the application of indemnity provisions in your contract either through exclusions, caps or other mechanisms.

In all cases, it is good to get a proper contract review which should cover any risks arising from these kinds of more nuanced considerations. Get in touch if you need help with your upcoming project.