If you are joining us in the real world of the construction industry, although a great industry to be part of, it is no fairy-tale. You would most likely, have been a party to a dispute that in some way involved negligence where everyone involved in the project has the finger (and blame) pointed at them. We just seem to be a litigious industry.
Once a claim is made, the questions then arise as to who is responsible for any alleged negligence (and damage caused) on a project and how much are they liable for? Perhaps the client contributed to its own negligence through its negligent directions? Maybe you relied on inaccurate certificates provided by another consultant on the project? Maybe you did in fact make a minor error in your own drawings? Or maybe all these things happened. The outcome and proportion that each party involved contributed to the negligence which resulted in the damage and loss, will impact on the amount of liability and damages they are accountable for.
So when a claim for negligence is made against you for which you may be (or even may not be) partially or wholly liable, there are two important legal tools to consider to assist in reducing (or even completely defending) your liability and damages payable. These tools are proportionate liability and contributory negligence.
“Proportions”? “Contributions”? Surely these are the same thing? Alas NO.
Simply put, contributory negligence is contribution of the party making the allegation of negligence (usually the client) to its own loss or damage whilst proportionate liability is the portion of liability for the alleged negligence that any “concurrent wrongdoers” might be responsible for (i.e. other parties who are not the client, usually other consultants, contractors, builders etc).
In the event of a negligence claim made against you, you will be able to reduce your liability (and damages payable to the claimant) in such a claim by using the tool of contributory negligence. That is, the liability and damages payable by you can be reduced by the percentage that your client’s own negligence contributed to the loss or damage caused.
For example, if your client was found to have contributed 25% of the negligence they received, then the client’s award for damages will be reduced by 25%, leaving you a reduced liability of 75% to defend. In this way, contributory negligence can either work as a full or a partial defence.
Proportionate Liability Regime
In general terms, the effect of proportionate liability legislation is that each party to the claim is only liable to compensate the claimant for the proportion of the loss they were actually responsible for causing. This means that the client will need to claim against all “concurrent wrongdoers” in order to recover its entire loss. This is also advantageous for any wrongdoers too, in order to reduce the liability and damages payable of each wrongdoer.
Using proportionate liability legislation in our example above, this means the 75% of liability for damages remaining would be allocated proportionately between all the wrongdoers, potentially reducing your own liability and the damages payable.
The practice of “contracting out” of proportionate liability legislation within consultancy agreements began in response to this legislation being effected and usually comes in the form of a specific clause within the consultancy agreement to that effect. Each of the various jurisdictions has differing legislation with regard to contracting out of proportionate liability.
Queensland does not allow contracting out whilst Victoria, ACT, SA and the NT legislation are silent about contracting out. Significantly, NSW, WA and Tasmania permit parties to exclude proportionate liability in their contracts.
The result of “contracting out” of this legislation, is that liability and damages relating to the claim would be determined by the traditional legal principle of “joint and several liability” whereby a claimant could recover its entire loss from any one wrongdoer as each wrongdoer was regarded as “jointly and severally” liable for the client’s loss. Using our example, the remaining 75% of liability and damages could be enforced against only that party most likely to meet the judgement debt, usually that party with the deepest pockets (i.e. those insured parties, like architects and engineers).
Even if the parties have not expressly contracted out of proportionate liability legislation within the consultancy agreement, the Courts within Australia may still consider that the parties chose to exclude proportionate liability legislation in any event. Case law has seen Courts holding that the parties have contracted out of proportionate liability legislation despite no express clause through contractually allocating risk and liability in a way which was not consistent with the operation of proportionate liability legislation, through risk allocation and liability within the indemnities, as one such example.
How can I manage my risk?
From a professional indemnity and risk management perspective, we see clients increasingly proposing that consultants sign their “standard” consultancy agreements which try to exclude their own liability in one way or another, and attempt to revert to the old ways of joint and severable liability, usually through indemnities and the exclusion of proportionate liability legislation. For this reason, these clauses should be very carefully considered.
Practically speaking, we suggest that you consider the following:
• Do not agree to “contract out” of proportionate liability legislation in your consultancy agreements.
• Insert a clause within your consultancy agreements expressly stating that proportionate liability legislation applies (so there is no confusion of implied “contracting out”).
• Carefully consider any indemnity clause to (amongst the other risks) make sure that it takes into account both the client’s contributory negligence and proportionate liability of other consultants, contractors etc.
• If you are unable to delete any clause “contracting out” of proportionate liability, or insert a clause stating that proportionate liability applies, keep in mind that you may be held liable, under the principle of joint and several liability, for the full amount of damages suffered as a result of an error of yours even if other parties had also made errors which contributed to that damage. To the extent that this clause prevents your (or your insurer’s) reliance on such legislation, it raises significant insurance issues and may result in losses which are not covered by your professional indemnity insurance policy.
• As you can see, proportionate liability and contributory negligence can be powerful legal protections in the event of an alleged claim made against you, so it is important to preserve your rights to rely on them.
Risk Manager NSW
This article is only general advice in respect of risk management. It is not tailored to your individual needs or those of your business, nor is it intended to be relied upon as legal or insurance advice. For such assistance you should approach your legal and/or insurance advisors.