The principle of “proportionate liability” is an important consideration in business particularly when entering into commercial contracts or agreements

where parties to a contract may be attempting to contract out of the operation of the proportionate liability regime.

Proportionate liability aims to apportion the responsibility for loss of each wrongdoer based on what the court considers just amount reflecting their comparative responsibility to the loss or damage.

The legislation was brought in response to the liability insurance crisis in 2001. However, there is currently no standardisation on this legislation and in regard to contracting out of proportionate liability. Some States expressly allow it; others are silent on the issue or prohibit it (only in QLD) which creates ambiguity on the applicability of this practice.

In all States and Territories in Australia, the proportionate liability regime applies to “apportionable claims” including (in tort, contract or under statute) economic loss or property damage arising from a failure to take reasonable care; where there are two or more concurrent wrongdoers; and a claim for compensation, an indemnity or liquidated damages.

Previously, defendants who had the deepest pockets carried the bulk of liability where loss was caused by the fault of many wrongdoers due to the joint and several liability that existed between them. This meant that a claimant could choose to sue one wrongdoer (deepest pocket) for 100% of the loss or damage even if there were other wrongdoers who may have also been responsible for the claimant’s loss or damage. Recovery from the other wrongdoers who contributed to the loss or damage was then left up to the defendant and if they were unfortunate enough to encounter bankrupt or insolvent wrongdoers, they would have to wear the loss.

With the proportionate liability legislation the courts determine how the loss is apportioned between defendants based on their part in contributing to the claimant’s loss. The claimant carries the risk if a defendant cannot pay their apportioned amount as determined by the courts, this risk does not lie with the defendant.

Indemnity clauses in commercial agreements are integral and can have serious implications for the contacting parties if this is not carefully considered and negotiated. At times, the ability to negotiate may be limited and you may find yourself having to contact out of proportionate liability and assume greater liability than what would otherwise attach to you by law just to win that flagship account.

Many times contracts are signed without fully understanding concept of risk allocation or its implications which can be significant.

This issue can be of great importance to construction, building and related industries where more often than not there are multiple contractors working together to complete a project.

Let’s take a construction project, where you may have a number of contactors and consultants involved in providing services. The developer has a commercial contract in place with the project manager where the indemnity clause allows the developer to pass 100% of the project risk to the project manager. Subsequently, it is discovered that there has been property damage as a result of negligence and defective work. This is where the finger pointing begins. However, because of the indemnity clause agreed to via contract which passes 100% of the project risk to the project manager, they will be accountable for 100% of the loss or damage despite the fact that their failure to supervise adequately may have caused only a small part of the damage. In addition, the project manager is left with the enormous task and cost of recovering from the contractors who may also have contributed to the damage. This may unfold further complications depending on what indemnity clauses have been agreed to between the project manager and its contractors and consultants. For example, the project manager has agreed to “be liable for the acts or omissions of its subcontractors or agents” which is quite common in a commercial contract than one may think.

The scenario would operate very differently if the indemnity clause had been based on the proportionate liability principle. In this scenario, the court would examine the extent to which the project manager contributed to the loss or damage and apportion that loss accordingly. If the court determines this to be 10% then that is the amount the project manager would be liable for. The task of recovering the remainder of the loss lies with the claimant who will need to sue all other wrongdoers for their contribution.

Contracting out of proportionate liability also has insurance implications.

Typically, an insurance policy will have contractual liability exclusion. This exclusion states that no cover will apply where an insured has assumed the liabilities under contact or agreement (whether expressly or implied) that would not otherwise attach to them by law in the absence of such contract or agreement. If you have agreed to contract out of proportionate liability and extend your legal liability beyond what would have applied at law, the contractual liability exclusion in your insurance policy may be triggered leaving you potentially uninsured.

There are ways to protect yourself against this and it begins with reviewing what commercial contracts you have in place and re-negotiating indemnity clauses to correspond with the terms and conditions of your insurance policy. An insurance broker should be able to assist and advise from an insurance perspective, however, they will not be able to provide legal advice. Therefore, it is strongly recommended that legal advice is sought when negotiating commercial contracts or agreements.