If you are a small consultant engaged on a major project, you would reasonably expect to be exposed from a liability perspective in respect of your own mistakes and nothing more.
Yet in New South Wales, Western Australia and Tasmania, consultants are being presented with contracts that according to many are forcing them to obtain insurance cover for liability which is well beyond what many would consider to be reasonably their responsibility and with respect to which cover may not indeed be available.
For many, this is creating problems in terms of bidding for work on major contracts. Indeed, a recent Consult Australia survey found that 69 per cent of all small consultants throughout New South Wales either have not proceeded or would not proceed with work because they would be forced to accept disproportionate levels of liability on the job. According to some respondents, they were in fact forced to accept liability which they considered to be disproportionate on all of their government and private sector work.
The basic problem, Consult Australia NSW state manger Matthew Trigg says, revolves around the ability to ‘contract out’ of a legal regime known as proportionate liability. Essentially, this is a concept where judges who preside over civil law cases in which more than one party is involved as a defendant apportion responsibility for any liability for any damages which are assessed to have been incurred on a proportional basis according to the degree to which each party is at fault. Where an engineer was considered to be 20 per cent responsible for damages which amounted to $2 million, for example, they under a proportionate liability system would have to pay an amount of $400,000.
In New South Wales, Tasmania and Western Australia, however, the legislation expressly enables parties to a contract to ‘contract out’ of the proportionate liability system. Where this happens, the parties in fact ‘agree’ by virtue of the contract that the legal concept of proportionate liability will not apply to work covered by the contract in question. Typically in such situations, the contract will specify which parties are liable for what under the terms of the contract. Not surprisingly, in many cases, the end result is that parties who have more bargaining power are able to use this to transfer excessive amounts of liability to less powerful, often smaller businesses who have less bargaining power.
According to Trigg, the upshot of this situation is that smaller consultants are being forced to assume contractual responsibility for risks over which they have no control in regard to risk management. Compounding that, he said, a large number of contracts are requiring consultants to obtain professional indemnity insurance for the life of the project plus the statutory period thereon after.
Given that insurance cover is provided on an annual basis, this means the consultant in question will need to purchase insurance each and every year for the life of the project. Trigg says this creates problems for consultants as it is uncertain as to whether or not insurance will in fact be available over the life of the project or whether or not the price at which it will be available will be reasonable.
In short, he says, smaller consultants are being forced to agree to levels of liability which are beyond their reasonable ability to control and with regard to which they may not be able to obtain affordable insurance. Because of this, he said, many are effectively being squeezed out from bidding for projects.
“We found that 69 per cent of small firms that we surveyed either have or would not bid for work, just because of that one clause (where they were forced to contract out of proportionate liability),” Trigg said.
“They don’t want to take on the risk or they can’t afford to take on the risk or they are simply not able to obtain insurance at an affordable rate.”
Apart from being unfair to consultants, Trigg said such practices are preventing small business from bidding for projects and thus weakening competitive pressure. Furthermore, he said, it creates a situation whereby risk is in fact allocated not on the basis of those who are in the best position to manage the risk in question but rather to those with the least bargaining power – a dreadful outcome from the point of view of risk management.
He would like to see other states follow Queensland’s lead in prohibiting the ability to contract out of proportionate liability. Queensland is indeed the only state to forbid parties from contracting out of proportionate liability. New South Wales, Western Australia and Tasmania specifically allow it, whilst legislation in other states is silent on whether or not parties can or cannot contract out.
Trigg is not alone in pushing for change. Engineers Australia, Sydney and Canberra general manager Greg Ewing said his organisation is part of the Liability Reform Steering Group which is focused on "maintaining proportionate liability as the norm" and “working with those jurisdictions that currently allow parties to an agreement to ‘contract out’ of proportionate liability."
Trigg says the ability to contract out of proportionate liability should go.
“The responsible thing that government can do to support small business is to remove their ability to contract out of the proportionate liability regime.” he said.
“You would have increased competition, you would have better risk management and you would have potentially lower fees for professional services from our industry.”