Contracting Out Of Proportionate Liability Regime - Aquagenics Pty Ltd v Break O’Day Council

The proportionate liability regime applies where a party is seeking to recover damages arising from a failure to take reasonable care or from misleading and deceptive conduct where the damages are caused by two or more persons/entities (concurrent wrongdoers).

If your claim is considered to be an "apportionable claim", your ability to recover all of the loss may be compromised because some concurrent wrongdoers may be insolvent or are unable to be located. The easiest way for the parties to contract out of the proportionate liability regime (assuming contracting out is permitted in your jurisdiction) is to expressly state that proportionate liability regime does not apply to the arrangement between the parties.

The question of whether the contract needs to expressly refer to the proportionate liability legislation was recently considered by Tasmanian Full Court in Aquagenics Pty Ltd v Break O'Day Council. In that case, the Court held that express reference to the legislation was not required.

The Tasmanian proportionate liability legislation is virtually the same as the New South Wales legislation. Accordingly, the Aquagenics decision is highly relevant to contracts governed by the laws of New South Wales.

The Case

The case involved a dispute between Break O'Day Council and Aquagenics in relation to the quality of the design and construction of a waste water treatment plant by Aquagenics.

The contract contained an arbitration clause requiring the parties to resolve the disputes between them through arbitration. Despite that, Aquagenics commenced proceedings against Council through the Court system.

Council sought a stay of the action. The Court at first instance granted a stay, as it was of the view that there was no sufficient reason why the matter should not be dealt with by way of arbitration.

Aquagenics appealed, asserting that a sufficient reason not to refer the dispute to arbitration was that the dispute between the parties was likely to involve novel and difficult questions concerning the proportionate liability provisions in Pt 9A of the Civil Liability Act 2002 (Tas).

The relevant section of the Act provided that:

Counsel for Aquagenics submitted that in order for the parties to have contracted out of the proportionate liability regime, the "express provision" had to, at the very least, include a reference to the Act.

The Court rejected Aquagenics' submission. The Court considered the provisions of the "standard form" contract between Council and Aquagenics including the following:

• warranties by Aquagenics;
• a prohibition on assignment without consent;
• a clause authorising Council to withhold "retention moneys" for the purposes of ensuring due and proper performance of the contract;
• the requirement for Aquagenics to effect insurance;
• an indemnity clause;
• the fact that the indemnity did not limit the liability for special, indirect or consequential losses; and
• the express provision that subcontracting part of the work did not relieve Aquagenics of its liability or obligation under the contract.

These clauses indicated to the Court that the parties had provided for the rights, obligations and liabilities in relation to the matters to which the Act applies in the contract.

Against this background, the Court held that the parties have contracted out of the proportionate liability regime and dismissed the appeal by Aquagenics.

The main reasons for the Court's decision were as follows.

• Such an interpretation of the contract was consistent with the principles of privity of contract. Aquagenics was a person to whom Council was entitled to look for a remedy. If Aquagenics was entitled to limit its liability in respect of the claim made by the Council by identifying other concurrent wrongdoers, the utility of provisions such as insurance and retention moneys would be greatly diminished.
• The provisions of the contract established that Council had the right to look to Aquagenics for the full amount of a claim and that an obligation and liability of Aquagenics was to meet the full amount of such a claim, subject to any reduction for contributory negligence. Express provisions of particular pertinence included a clause that made Aquagenics liable for acts and omissions of sub-contractors. While that clause was not expressed so widely as to cover every conceivable entity that might be a concurrent wrongdoer, its intent was plain. The fact that a concurrent wrongdoer may emerge that was not a subcontractor or an employee or an agent of a subcontractor, did not mean that the contractor was entitled to have its liability to the principal limited under the proportionate liability legislation.

Application to the financial services industry

Contracts in the financial services industry often include provisions that make a party (such as mortgage originators) responsible for the acts of its subcontractors or agents. It is arguable that such a provision (along with warranties and indemnities) would assist lenders in maintaining that the proportionate liability regime does not apply.

A better approach though is to have an express clause that excludes the operation of any proportionate liability legislation. Gadens Lawyers have for some years been recommending that proportionate liability is expressly negated in our contracts prepared for the financial industry. This is of particular importance in cases involving fraud by the borrowers or brokers where concurrent wrongdoers are insolvent or untraceable.

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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.