In our last edition of In-Focus | Financial Risk, we addressed the emerging apportionment issues, but left for another alert the ability of contracting parties to contract out of proportionate liability provisions. This edition of In-Focus | Financial Risk will look at the current state of affairs.

There remains considerable uncertainty as to the application of the proportionate liability provisions in the various jurisdictions in Australia when it comes to contractual terms that make express provision for the parties’ rights, obligations and liabilities. Such terms are commonly found in commercial contracts, such as construction contracts. This is particularly the case given the discrepancies that exist between the legislative provisions in each of the jurisdictions, and the limited case law on the matter. Unfortunately, this uncertainty will remain until the courts resolve the issues or amendments are made to the Acts in each jurisdiction.

Insurers and insurance brokers need to be alert to these issues to avoid claims against themselves.

Contribution and indemnity

All jurisdictions (other than South Australia) have a section the same as section 87CF of the Competition and Consumer Act 2010 (Cth) (Contribution Section) in their proportionate liability provisions. That section provides:1

A defendant against whom judgment is given under this Part as a concurrent wrongdoer in relation to an apportionable claim:

  1. cannot be required to contribute to any damages or contribution recovered from another concurrent wrongdoer in respect of the apportionable claim (whether or not the damages or contribution are recovered in the same proceedings in which judgment is given against the defendant); and
  2. cannot be required to indemnify any such wrongdoer.

A literal reading of the Contribution Section would suggest that contractual indemnities or allocation of risk have ceased to be effective, subject to the ability of parties to contract out of the proportionate liability provisions discussed further below. This appears to have been the position taken by Barrett J in the New South Wales Supreme Court decision of Reinhold v New South Wales Lotteries Corp (No 2).2

However, in regard to the proportionate liability provisions in the Wrongs Act 1958 (Vic), Nettle JA said in St George Bank Ltd v Quinerts Pty Ltd:3

In particular, there is no suggestion in Pt IVAA that it was intended to do more by way of apportionment than in theory could previously be achieved by contribution under s 23B of the Act.

This would suggest that the Contribution Section does not invalidate contractual indemnities. This was certainly the position taken by Professor McDonald when she said:4

There is no obvious reason of policy or justice which would prevent a defendant from enforcing a voluntarily entered, pre-existing contractual arrangement against another.

However, if this was the intention of the Contribution Section, why did Western Australia, Tasmania and the Northern Territory feel the need to add a second subparagraph to the Contribution Section, which provides:5

Subsection (1) does not affect an agreement by a defendant to contribute to the damages recoverable from or to indemnify another concurrent wrongdoer in relation to an apportionable claim.

Contracting out

Is contracting out permitted?

Even if the Contribution Section does not apply to contractual indemnities, those indemnities may still be ineffective if contracting out is prohibited. It has been said that:6

Whether or not a party can contract out of proportionate liability depends on the relevant jurisdiction. The generally accepted view is that it is not possible for parties to limit or exclude their liability for breach of statutory prohibitions on misleading or deceptive conduct. As to common law liability, there is an important and regrettable variation between the legislation of the various states on this issue.

The need to revert to the  “generally  accepted view” in regard to  the Commonwealth proportionate liability provisions in the Competition and Consumer Act 2010 (Cth), the Australian Securities and Investment Commission Act 2001 (Cth) and the Corporations Act 2001 (Cth), is because these Acts remain silent on the ability to contract out of those provisions. Because of this view, it is likely that the courts will find that a contractual indemnity is ineffective as concerns those Commonwealth provisions.

However, section 3A(2) of the Civil Liability Act 2002 (NSW) relevantly provides:

This Act … does not prevent the parties to a contract from making express provision for their rights, obligations and liabilities under the contract with respect to any matter to which this Act applies and does not limit or otherwise affect the operation of any such express provision.

Therefore, contracting out of the proportionate liability provisions in the Civil Liability Act 2002 (NSW) is expressly permitted by this subsection. Similar provisions are also found in Tasmania and Western Australia.7

Similarly, in the Northern Territory, although the Proportionate Liability Act 2005 (NT) does not contain a provision similar to section 3A of the Civil Liability Act 2002 (NSW), it is arguable that such a provision is not required as it contains the second subsection to the Contribution Section referred to above, which has the same effect.

At the other end of the spectrum, Queensland expressly excludes the ability to contract out of its proportionate liability provisions.8

In Victoria the Wrongs Act 1958 (Vic) contains a number of provisions which provide that certain parts can be expressly excluded by contract. As no such provision is included in regard to the part dealing with proportionate liability, based on the expressio unius est exclusion rule, it is arguable that the parties to a contract cannot contract out of the Wrongs Act 1958 (Vic) proportionate liability provisions.9

Similarly, as concerns the remaining States and Territories where their regimes also remain silent on contracting out, without that express contracting out provision, it is arguable that the parties to a contract will not be able to contract out of the proportionate liability provisions of those jurisdictions.

What will amount to a contracting out of the proportionate liability provisions?

There have been only two decisions, one each in New South Wales and Tasmania,10 which have determined what will amount to a contracting out of the proportionate liability provisions in those jurisdictions as parties are entitled to do.

Macfarlan JA held in Perpetual Trustee Company Ltd v CTC Group Pty Ltd (No 2):11

… The question to which s 3A(2) gives rise is whether a contract makes express provision for the parties’ rights, obligations and liabilities which differs from that provided by the Act. It is not relevant to consider whether the parties adverted to the existence of the apportionment provisions of the Act and decided to contract out of them. Section 3A “does not require the parties to use any particular form of wording to effect a contracting out” (Aquagenic at [71]). No reference needs to be made to the Act. All that matters is that the contractual indemnity is inconsistent with the provisions of Part 4.

In that case, the subject clause was found to be inconsistent with the application of the proportionate liability provisions in Part 4 and, thereby, effected a contracting out of those provisions. That clause relevantly provided:

14.3     Originator’s indemnity

The Originator [CTC] indemnifies the Trustee [Perpetual] and the Manager [Resimac] against any liability or loss arising from and any costs, charges and expenses incurred in connection with:

(d)        any breach by the Originator of any of its warranties or obligations under or arising from this deed or failure to perform any obligation under this deed,

including, without limitation, liability, loss, costs, charges or expenses on account of funds borrowed, contracted or used to fund any amount payable or expense incurred under this deed and including in each case, without limitation, legal costs and expenses on a full indemnity basis or solicitor and own client basis, whichever is the higher.

In Queensland, and potentially those jurisdictions that remain silent on the issue, any contractual indemnity similar to this clause could be found to be an attempt to contract out of the proportionate liability provisions and could, therefore, be ineffective.

What this means

For the reasons set out above, contracting parties need to be wary of any contractual indemnities included in their contract, particularly in jurisdictions other than New South Wales, Tasmania, Western Australia and the Northern Territory. This is because they may be found to be ineffective when the party with the benefit of the indemnity seeks to rely on it in regard to an apportionable claim.

However, if a contractual indemnity is found to be effective to contract out of the proportionate liability provisions, the party providing the indemnity could potentially be risking cover under their liability insurance. This is because that type of insurance usually includes a clause that excludes cover for assumed liability which the insured would not have otherwise had at law, such as in circumstances where the proportionate liability provisions apply to a claim made.

Therefore, an insured who is considering signing a contract that includes an indemnity should speak with their insurer or their insurance broker to determine whether it would be willing to extend cover beyond the standard terms to include such a liability. Insurer and their brokers need to be alert to these issues or face liability themselves or face liability for negligent failure to melt their obligation as insurance brokers and underwriters to their insured clients.