Australia: Just When You Thought You Had Worked Out How To Deal With Proportionate Liability…

Key Points

  • Model uniform proportionate liability legislation is being considered by the States and Territories.
  • The proposed uniform legislation will resolve some existing problems. However, the right to contract out which exists in some jurisdictions may be abolished.

Proportionate liability legislation, which was introduced across Australia in 2004 and 2005, is currently the subject of national review and imminent reform. The legislation is different in each jurisdiction, and its drafting has created many uncertainties as to how it works.

Two influential reports commissioned by the National Justice CEOs Group make bold recommendations to clarify these uncertainties and institute a uniform national model for the legislation:

  • "Proportionate Liability: Towards National Consistency", prepared by Mr Tony Horan, provides a detailed analysis of the history, purpose and commentary on the legislation together with recommendations for its reform.
  • "Proportionate Liability: Proposals to Achieve National Uniformity", prepared by Professor Jim Davis, puts forward more detailed drafting proposals to assist the Standing Committee of Attorneys-General (SCAG) to achieve national uniformity of the proportionate liability legislation.

The Horan report makes 28 recommendations. The Davis report makes 12 proposals, some of which support the Horan recommendations and some of which provide an alternative approach.

SCAG has prepared policy recommendations and final drafting instructions for the model uniform legislation, taking into account the findings in the two reports, and submissions on these drafting instructions have been invited from key stakeholders. The primary issues that remain unresolved relate to contracting out, forum shopping and impacts on the complexity of litigation.

Is proportionate liability a good idea and who should it apply to?

Horan recommends the application of proportionate liability be limited so that it only applies to claims against "professionals" or relating to the provision of "professional services". He says this would remove its application to construction, civil engineering and infrastructure contracts and subcontracts, among others. SCAG has made it clear in the drafting instructions that it does not support this approach.

Although not raised in either report, there are sound arguments for repealing the proportionate liability legislation altogether. The original aim of the legislation was to ensure that adequate or affordable liability insurance continues to be available. Despite the temporary insurance crisis which followed the collapse of HIH, however, no other common law jurisdiction (with the exception of some US states) has a proportionate liability scheme of this type and yet adequate and affordable insurance is available in those countries. It appears that the introduction of proportionate liability was an overreaction to the 2000-01 insurance crisis. To the extent that there is a continuing concern that professional indemnity insurance will not be generally available, other mechanisms such as limiting the liability of professionals under the professional standards legislation would be more appropriate for achieving these objectives.

Other arguments supporting repeal of the legislation include:

  • it is unfair for an innocent plaintiff to bear the risk of insolvent wrongdoers when there are other concurrent wrongdoers who are responsible for the loss or damage
  • it increases the complexity and cost of proceedings as it increases the number of defendants
  • the apportionment of liability to absent defendants offends the principles of natural justice and the rule that a court's decision should only relate to the interests of the parties before it; and
  • it prevents parties of equal bargaining power choosing to commercially allocate their risks.

Impacts on contractual risk allocation

The legislation presently gives rise to several areas of uncertainty regarding the contractual allocation of risk, including:

Can the legislation, which applies to claims "arising from a failure to take reasonable care", apply to a claim for breach of a strict contractual obligation?

Horan and Davis note that the definition of an apportionable claim is problematic in relation to contractual claims. In the drafting instructions, SCAG adopt the recommendation by Davis that the definition of "apportionable claim" be amended such that it is one which arises only from:

  • a breach of a tortious duty of care, or from a breach of a contractual obligation which is concurrent and co-extensive with such a tortious duty; or
  • a breach of the statutory prohibition on misleading [or deceptive] conduct.

The words "or deceptive" have been added to Davis' recommendation by SCAG. The proposed amendment would mean that the only contractual claims to which the legislation would apply would be claims for breach of a contractual obligation to exercise "due care and skill", or other contractual obligations which mirror tortious duties (such as a contractual obligation not to cause nuisance). Accordingly, a claim for breach of a strict contractual obligation (being an obligation which can be breached even though the non-compliance may not be due to any want of care by the contractor, such as an obligation to ensure the works are "fit for their intended purpose") could not be an apportionable claim, even if the breach factually arises from the contractor's want of care. This will significantly reduce present concerns regarding the potential application of the legislation to claims for breach of strict contractual obligations.

Can a person who has contributed to a plaintiff's loss, but who has no legal liability to the plaintiff, be a concurrent wrongdoer?

We have previously written on the uncertainties surrounding the definition of "concurrent wrongdoer". SCAG's drafting instructions adopt recommendations by Horan and Davis that this definition be amended to mean one of two or more persons who:

  • not only caused, but is also legally liable for, the loss or damage which is the subject of the apportionable claim, even if an act or omission of the plaintiff has extinguished that liability; and
  • caused that loss independently of each other or jointly. [emphasis added]

This would resolve the existing uncertainty and adopt the judicially preferred interpretation (see Shrimp v Landmark Operations Limited [2007] FCA 1468 and Fletcher Insulation (Vic) Pty Ltd v Renold Australia Pty Ltd [2006] VSC 269). It would clarify that parties who owe no contractual or tortious duty of care to the plaintiff owner (such as subcontractors to a head contractor whose negligence results in defective building work causing the plaintiff building owner to suffer defect rectification costs, diminution in the value of the building or other forms of "pure economic loss") will not be concurrent wrongdoers.

The amended definition will, of course, crystallise the conundrum which owners presently face when considering whether or not to obtain direct contractual warranties from subcontractors which establish a duty of care where it would not otherwise have existed.

Are contractual indemnities between concurrent wrongdoers enforceable (eg. where a subcontractor indemnifies a head contractor for liability to the principal caused by the subcontractor)?

Horan recommends that contractual rights to claim contribution or indemnity by one concurrent wrongdoer against another be preserved.

Both Horan and Davis recommend that the provisions in the legislation which state that a defendant cannot be required to contribute to any damages or contribution recovered from another concurrent wrongdoer and cannot be required to indemnify any such wrongdoer be followed by a subsection stating:

"Subsection (1) does not affect an agreement by a defendant to contribute to the damages recoverable from or to indemnify another concurrent wrongdoer in relation to an apportionable claim."

This recommendation is adopted by SCAG in its drafting instructions and comes as welcome news to those who require the certainty of the established risk allocation in their contractual arrangements, both for their own peace of mind and for their insurers', financiers' and guarantors'.

Can the legislation affect the contractual allocation of liabilities between a principal and a joint venture, or between joint venturers?

We have previously written on the potential for proportionate liability legislation to affect the contractual allocation of risk between a principal and two or more joint venture contractors (where, for example, the joint venture contractors agree that each will be jointly and severally liable to the principal), and between the joint venturers themselves1.

Horan notes that proportionate liability should not interfere with joint venturers who agree, for commercial reasons, to allocate their joint liability in a particular way. Otherwise, investors, financiers and others who stand behind major transactions and projects cannot be confident that the contracts they sign and the arrangements they approve will be upheld by the courts. While neither Horan nor Davis make any specific recommendations in relation to joint ventures, the recommendations discussed above were made with these contractual arrangements in mind.

Principals should therefore obtain indemnities from each joint venturer if they want the ability to recover 100 percent of their loss from either joint venturer. Joint venturers should include appropriate indemnities in their joint venture agreement if they want to share liabilities as between themselves in proportions which may differ from the proportions determined by a court or tribunal having regard to their responsibility for the loss or damage.

Is it possible to contract out of the proportionate liability legislation?

Some jurisdictions expressly permit parties to contract out of the legislation. Others expressly prohibit contracting out. Most are silent on the issue.

Horan makes two recommendations on this point in the alternative. First, he recommends that there should not be any ability to contract out of the proportionate liability legislation. In the alternative, however, he recommends that a right to contract out may be introduced in all States and Territories on the basis that it is not permitted in relation to the liability of a professional or in respect of the provision of professional services. Davis, on the other hand, supports only the first recommendation.

The recommendations by both Horan and Davis should however be read in light of their recommendations noted above which seek to preserve contractually agreed risk allocations. These two recommendations would appear to be inconsistent, as the provision of an indemnity can have the same effect as contracting out. SCAG has not given any indication of its position on this point and has requested submissions from key stakeholders addressing this issue.

Concluding remarks and drafting implications

It is a little surprising that neither Horan nor Davis consider whether the original motivations for proportionate liability remain valid, given the inherent unfairness in imposing the risk of insolvent wrongdoers on plaintiffs rather than other concurrent wrongdoers, and the impact it has on contractual risk allocation and the cost of litigation. SCAG ought to take this opportunity to reconsider whether proportionate liability remains appropriate.

If it does remain, and the drafting instructions are implemented together with a prohibition upon contracting out, the inclusion of appropriate indemnities, drafted with great care and a thorough understanding of their effect on the parties, will become an essential element of contract negotiation and drafting. Parties will also need to ensure that the professional indemnity insurance and public liability policies of the party who assumes any risk under the contract by means of such provisions will not be invalidated as a consequence of voluntary assumption of risk.


1. See Stephenson, A, "Proportionate liability in Australia - The death of certainty in risk allocation in contract', [2005] The International Construction Law Review 64 and Hayford, O, 'Proportionate liability - its impact on risk allocation in construction contracts', (2006) 22 Building and Construction Law Journal, 322

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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