Australia: Proportionate Liability - Will Project Owners Be Left Footing The Bill?

Originally published 17 November 2004

Recent and proposed changes to the law relating to the apportionment of liability mean that, where there are a number of concurrent wrongdoers, plaintiffs will no longer be able to recover all their damages from one wrongdoer. Rather, plaintiffs will only be able to recover from each wrongdoer the damage for which that wrongdoer was responsible. These changes will mean that project participants in large infrastructure projects may not be liable for the mistakes of their counterparts, and without careful management, project owners could be left footing the bill.

Liability was traditionally apportioned according to the principle of joint and several liability. Under this scheme, a defendant could be required to pay the entire amount of the plaintiff's loss, notwithstanding that the defendant's responsibility for that loss may have been minor compared to other wrongdoers. It was then the responsibility of the defendant to claim contribution from the other concurrent wrongdoers.

The collapse of the HIH insurance group in 2001, combined with a general reduction in competition between insurers, resulted in significant increases in premiums. It was thought that the principle of joint and several liability partly contributed to this "insurance crisis" because in cases where wrongdoers were insolvent or unavailable, the whole of the burden fell on well-insured or "deep pocket" defendants.

Proportionate liability was seen as a solution to this problem. Under this scheme, liability is shared among concurrent wrongdoers according to their respective levels of responsibility. A problem arises when one wrongdoer is insolvent or otherwise unavailable. Thus, because project owners will not be able to recover all damages from the one project participant, the project owner may not be able to recover the full damages to which it is entitled.

Proportionate liability legislation was first introduced in the building industry in the early 1990s. Only in Victoria, under the Wrongs Act 1958 (Vic), is a general proportionate liability scheme in operation. Legislation has also been passed (but has not yet commenced) in Western Australia in the Civil Liability Act 2002 (WA), Queensland in the Civil Liability Act 2003 (Qld) and New South Wales in the Civil Liability Act 2002 (NSW). The Commonwealth has also passed proportionate liability legislation as part of the Corporate Law Economic Reform Program (Audit Reform & Corporate Disclosure) Act 2004.

Similar legislation is currently before the Tasmanian and ACT parliaments.

Proportionate liability is intended to apply to economic loss or damage to property in an action for damages, arising from a failure to take reasonable care. This is the situation in Victoria, New South Wales and Western Australia. The Queensland Act is more conservative and proportionate liability only applies to claims over $500,000. For policy reasons, joint and several liability is preserved in a number of situations. The precise circumstances differ between the States, but they may include vicarious liability, agency, fraud and intentional damage.

In cases where there are concurrent wrongdoers, liability is to be limited to a proportion that reflects the defendant's responsibility. Judgment is not to be given against the defendant for more than that amount. To ensure the plaintiff has access to the whole of the compensation to which it is entitled, the legislation in all States reinforces the abolition of the common law rule that a judgment against one wrongdoer releases the others from liability.

Important to understanding the scope of the legislation is to understand what is meant by the term "damages". Western Australia adopts the common law standard, but the other States adopt a wider definition of "any form of monetary compensation".

As a result of this wide definition of "damages", these changes have the potential to interfere with the risk assumptions between contracting parties. Consider the following example:

A principal lets a design and construct contract to a contractor which requires the contractor to:

• perform the works by a certain date;
• construct the works to a standard that is to be expected of a reasonably competent contractor; and
• design the works to the standard expected of a reasonably competent engineer. This risk is insured.

Consider a situation where the contractor breaches all three warranties:

• the delay to completion can be shown to be 97 percent the responsibility of a subcontractor, which has no assets;
• the quality of work is poor. This is shown to be 80 percent a result of acts of the subcontractor, and 15 percent due to the acts of another subcontractor;
• the design was prepared by an engineer who carries $5m worth of professional indemnity insurance. The designer was 90 percent responsible for design errors that will cost $200m to rectify.

In each case, assuming the Victorian Wrongs Act applies, the interpretation of the amendments advanced above is correct, and the relevant parties are joined to the subsequent litigation, the contractor will only be liable to the extent of its responsibility, with the result that:

• its liability in respect of delay costs will be limited to 3 percent of the total;
• its liability for defect work will be 5 percent of the total loss; and
• its liability in respect of the design defects will be limited to 10 percent of the total loss.

Furthermore, the principal runs a significant risk that it will not recover the full amount to which it is entitled due to the fact that the subcontractor has no assets. This puts debt, equity and Government in a difficult position when assessing the risk of entering into a transaction.

The above example illustrates that owners may not be able to rely fully on the balance sheets of participants in a project, even if they have contractually accepted the risks. Of course, in cases where all wrongdoers are capable of meeting their respective liabilities, the legislation will have limited practical effect on the damages recovered. However, where a wrongdoer is insolvent and therefore unable to meet its liability, the amount recoverable will be reduced. The end result is that parties may not always be able to rely upon the risk allocations agreed in their contracts. Furthermore, counterparties who have provided indemnities or warranties may seek to ensure that they play some active role in the management of relevant risks, albeit a minor one, in order to take advantage of the legislation and limit their liabilities. Only time will properly reveal how this legislative scheme will impact the rights of parties.

The most significant difference between the schemes in the various jurisdictions is that under the Western Australian scheme, parties are allowed to contract out of proportionate liability. The Victorian, Queensland (after the amendments of 17 September) and New South Wales legislation include no such provisions. Because there is not yet a consistent national model for proportionate liability, the inconsistency between the legislation enacted in the States and Territories may give rise to forum shopping and contracting parties will be able to choose the governing law of the contract and the apportionment of liability that best suit their particular circumstances.

Another important difference between the States is the way in which the courts will assess the responsibility of the defendant(s). In New South Wales and Western Australia, the legislation allows the court to compare the responsibility of defendants, even where the defendants may not be parties to the proceedings. This is not allowed under the Victorian and Queensland legislation unless the party is dead, or (if a corporation) wound up.

The New South Wales legislation also requires the defendant to inform the plaintiff of other concurrent wrongdoers, in an attempt to reduce costs for the plaintiff in pursuing its claim and to ensure the plaintiff recovers the full amount to which it is entitled. This appears to be an attempt to strike a balance between the fair apportioning of liability, and the right of a plaintiff to full recovery.

With these differences in mind, although all States support a nationally consistent model for proportionate liability, it is apparent that a more co-ordinated effort is required if a uniform framework is to be put into place. If proportionate liability is to be successful it is important to get the legislation right and that includes having legislation that is consistent between the various jurisdictions. It will interesting to see how the other States draft their legislation and whether the various States consider that further amendment might be required because of the impact this legislation may have on Government projects.

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