Proportionate Liability: Watch Out!

Monday, June 20th, 2016
liked this article
Siemens – 300×250 (Expires October 31st 2017)
FavoriteLoadingsave article

Around Australia, one of the most significant changes to liability legislation over recent decades has been the introduction of proportionate liability, which essentially limits the liability of engineers when something goes wrong on a project to the extent to which any fault or negligence on their part has contributed to the problem in question.

However, a potential problem arises with regard to the ability of parties to a contract across most states to agree to ‘contract out’ of proportionate liability, in which case parties within a construction project agree (or one or more parties to a contract forces other parties to agree) that proportionate liability will not apply to the project in question.

Prior to the introduction the current regime, liability for damages in cases where there is more than one wrongdoer was determined according to a system known as joint and several liability. Under this system, plaintiffs were able to take action against any one party for the entire amount of damages claimed, the defendants then being left to sort out their respective proportions of liability and payment amongst themselves. Under such a system, engineers faced the prospect of potentially being sued for the entirety of damages suffered as a result of any calamity (as professionals who generally carry insurance, engineers are popular targets for action). Whilst they would then be able to cross-claim against any other parties who were also at fault, this would be of limited value in cases where one or more of the parties in question was not able to be found or was insolvent.

By contrast, the current regime of proportionate liability was introduced following the insurance crisis early in the last decade and applies across all states in Australia unless the parties agree to ‘contract out’ of this system. Under this system, judges are able to apportion liability between wrongdoers according to an assessment of the extent to which the party in question is responsible for any damage suffered. Each party’s exposure to liability is limited according to their assessed portion of any damages irrespective of whether or not other parties are able to meet their own share of the liability. Under this system, where poor structural design considered to be a 10 per cent contributory factor leading to damages of $1 million awarded for a poorly constructed building, for example, the engineer would be liable to pay $100,000 and his exposure and no more.

Whilst this delivers fairer outcomes, concerns have been voiced over many years about the ability of parties to ‘contract out’ of the system. Where this happens, construction lawyer and partner at Norton Rose Fulbright Rob Buchanan says, the proportion of liability for which the engineer is responsible will be determined according to the provisions of the contract. In such a circumstance, the engineer could potentially wind up being liable for a share of damages which is disproportionate to the extent to which they are at fault with regard to the situation concerned.

Currently, Queensland is the only state which expressly prohibits this practice. Legislation in New South Wales, Tasmania and Western Australia specifically permits contracting out of proportionate liability, whilst all other states have remained silent on whether or not it is or is not allowed. Draft model legislation at a national level designed to promote harmonisation in this area includes a prohibition on contracting out but includes an exception for agreements for one concurrent wrongdoer to contribute to the damages recoverable from, or to indemnify, another concurrent wrongdoer.

So is this something which engineers should be wary of, and should it be allowed?

From the viewpoint of engineers, Buchanan says contracting out is a dangerous proposition, especially given the size of contractual risk associated with many construction projects and the limited capacity of engineers to influence what happens during construction (outside of cases where they are also project managers).

“The engineer’s fees are never substantial in terms of the overall volume of money which goes into a project and the level of contractual risk which goes into a project,” Buchanan said. “Also, usually an engineer is performing a consultant’s role and often does not have any significant operational control of the project. He (or she) doesn’t have any way of managing the risk which the main contractor will be managing.

“My general feeling about risk is that it should be borne by the party which is best places to manage it. Exposing an engineer to risks which firstly are huge in comparison to the level of their fee income and in relation to their ability to manage simply makes the bargain from the engineer’s perspective a lot less viable.”

A number of professional associations agree.

“Contracting out undermines the anticipated benefits of proportionate liability and puts professional service providers and consumers at risk due to exposure to uninsured liability,” Engineers Australia (EA) said in a written response to questions.

According to EA, contracting out is common in both government and private sectors, and often results in clients dictating excessive liability limits to professional service providers on a “take it or leave it” basis with contract terms usually specifically excluding both proportionate liability and professional standards schemes.

So what are the problems?

First, there is the issue of insurance. Where engineers (or any other party) agree to take on liability which is greater than what would have been the case under ordinary proportionate liability, they are taking on what is known as contractually assumed liability. Depending upon policy wordings, this may or may not be covered under professional indemnity insurance. Where this is not the case, engineers have to either attempt to negotiate additional protection in order to cover this additional liability or run the potential risk of financial ruin in the event that things go wrong on the project.

Adjusting PI insurance in order to accommodate this additional liability, EA says, can see premiums rise by as much as 20 per cent – if the insurer is even willing to cover the additional liability at all. In extreme cases, insurers may refuse outright to cover any engineers who do contract out.

Beyond insurance, Buchannan says contracting out proportionate liability may create other problems. Where large aspects of project risk are apportioned to parties other than those who are in the best position in which to manage that risk, he says, those parties who are indeed in the best risk management position are likely to be less proactive in terms of their risk management efforts.

Second, forcing undue levels of risk upon engineers and other professionals cause the engineer in question to become overly cautious in their approach to the work and in regard to their documentation. Such a situation is non-conducive to the promotion of innovative design solutions and may result in unduly slow response times – a phenomenon which is contrary to the need for engineers to be nimble and able to provide timely advice throughout the course of projects.

EA goes so far as to say contracting out proportionate liability should be banned. Enabling the contracting out of proportion liability will have negative impacts across a full spectrum of professional services, add to project costs because of costs associated with additional PI insurance, cause protracted contract negotiations and legal review, and undermine the long-term objective of maintaining the ongoing availability of affordable PI insurance.

“Equally concerning is the negative impact it will have on competition in supply or services, especially for smaller professional engineering enterprises and their ability to compete for work,” EA said. “Under a regime of contracting out, professional service providers will be pressured into working outside the proportionate liability framework by larger, more powerful and commercially-sophisticated clients. Commercial reality dictates that those with the most bargaining ability will be able to force harsh contractual terms on engineering consultants, particularly the small to medium enterprises.”

Finally, EA says, the ultimate losers out of any form of policy which would jeopardise the ability of design professions to obtain affordable levels of insurance are consumers, who would then be limited in terms of their ability to successfully recover compensation where things went wrong.

Buchanan is split on the matter, saying larger firms should generally be free to contract with each other upon terms of their choosing but adding that protection may be needed for small firms. He says one possibility would be to have a threshold and to allow parties to contract out provided the contract amount was over and above a given threshold.

“The way the common law and contract law is drafted is to allow sophisticated and mature organisations to do business in any way in which they see fit,” he said. “On that basis, if two sophisticated and large organisations were wanting to contract out of a piece of legislation that’s really designed solely for risk purposes rather than occupational health and safety, on its face, you would expect that they are going into it with their eyes open. I don’t think they should be prevented from going into it on that basis.

“But the guys at the smaller end are no less capable, they just happen to be less large. I question whether you should allow a huge entity to put their (the smaller entity) people’s houses on the line in relation to a risk that you are going to stop them from being able to manage. It doesn’t seem fair.”

FavoriteLoadingsave article


 characters available
*Please refer to our comment policy before submitting