PROPORTIONATE LIABILITY IN THE CONSTRUCTION INDUSTRY

presented by Mark J. Attard, of Norton Rose Fulbright

at the BDPS Annual Conference

20 October 2017

1 Many commentators writing on proportionate liability commence their discussion with the so-called “insurance reforms” which followed the collapse of HIH in 2001. In Victoria, these reforms were introduced through amendments to the Wrongs Act 1958 which commenced operation in 2004. However, those working in the construction industry would know that building disputes have been subject to proportionate liability since 1994. Section 131 of the. Building Act 1993. provided:

“After determining an award of damages in a building action, the court must give judgment against each defendant to that action who was found to be jointly or severally liable for damages for such proportion of the total amount of damages as the court considers to be just and equitable having regard to the extent of that defendant’s responsibility for the loss or damage.”

2 One of the defining features of the early model of proportionate liability in Victoria was that liability was to be apportioned between “defendants”. With few exceptions, under the Victorian regime, there was no apportionment of responsibility with parties outside the litigation. Proportionate liability was an “invitation only” event.. Unfortunately, this peculiarly Victorian feature has survived the review and reformulation of proportionate liability introduced by the Wrongs Act. Victoria stands alone as the only jurisdiction that requires concurrent wrongdoers to be parties in any litigation for apportionment purposes.

3 What is proportionate liability?

3.1 Until the introduction of proportionate liability, responsibility for compensation was shared between defendants on a joint and several basis. This meant that each defendant found liable to the plaintiff was 100% liable for the compensation awarded to the plaintiff

3.2 This system resulted in those with deep pockets meeting the liabilities of those who were not insured or impecunious. The system bore this inequity and imbalance for a considerable time. The guiding principle was that claimants should be paid and the law was not overly concerned as to who paid them.

3.3 However, our compensation schemes began displaying cracks and failings following the collapse of HIH in 2001. Suddenly, contractors and professionals found it difficult to either obtain insurance or secure insurance on reasonable terms. The disappearance of HIH saw a significant volume of capacity leave the Australian insurance market with few insurers prepared to fill the breach.

3.4 Subsequent investigations, inquiries and reports identified joint and several liability as a significant deterrent to insurers. A new model of compensation was required to make the insurance of contractors and professionals attractive once more for local and overseas insurers.

3.5 It is important to remember this motivation for the widespread introduction of proportionate liability as often its origins are forgotten or overlooked in the implementation of the regime.

3.6 Proportionate liability means that a wrongdoer who is legally responsible for a loss, is only liable for a portion of the claim as judged by a court and tribunal. No longer are wrongdoers responsible for 100% of any judgment. A wrongdoer is not required to contribute or indemnify another wrongdoer for their proportion of liability.

3.7 One of the consequences of proportionate liability is that the risk of impecunious or uninsured wrongdoers shifts to the plaintiff.

4 How does it work?

4.1 The Victorian proportionate liability provisions are found in Part IVAA of the Wrongs Act. Each State and the Commonwealth have their own proportionate liability provisions but this paper will focus on the Victorian provisions which, as indicated earlier, are unique and separate from the provisions in every other jurisdiction.

4.2 I propose to comment on certain elements of proportionate liability particularly,

(a) What is meant by a “failure to take reasonable care”?

(b) Are statutory warranties in home building contracts apportionable?

(c) How is “loss and damage” treated under the proportionate liability regime?

(d) Who are concurrent wrongdoers? and

(e) Are indemnities apportionable?

4.3 The operative provisions in the Wrongs Act are as follows:

Section 24AF (1) This Part applies to –

. (a) a claim for economic loss or damage to property in an action for damages (whether in tort, in contract, under statute or otherwise) arising from a failure to take reasonable care; and

. (b) a claim for damages for a contravention of section 18 of the Australian Consumer Law (Victoria) (Misleading and deceptive conduct).

Section 24AH (1) A concurrent wrongdoer, in relation to a claim, is a person who is one of 2 or more persons whose acts or omissions caused, independently of each other or jointly, the loss or damage that is the subject of the claim.

Section. 24 AI (1) In any proceeding involving an apportionable claim –

. (a) the liability of a defendant who is a concurrent wrongdoer in relation to that claim is limited to an amount reflecting that proportion of the loss or damage claimed that the court considers just having regard to the extent of the defendant’s responsibility for the loss or damage; and

…….

(c) In apportioning responsibility between defendants in the proceeding the court must not have regard to the comparative responsibility of any person who is not a party to the proceeding unless the person is not a party to the proceeding because the person is dead or, if the person is a corporation, the corporation has been wound-up.

Section 24 AJ. Despite anything to the contrary in Part IV, a defendant against whom judgment is given under this Part as a concurrent wrongdoer in relation to an apportionable claim –

. (a) cannot be required to contribute to the damages recovered or recoverable from another concurrent wrongdoer in the same proceeding for the apportionable claim; and

. (b) cannot be required to indemnify any such wrongdoer.

4.4 Proportionate liability schemes, exclude personal injury claims and fraudulent wrongdoers. Accordingly, if a wrongdoer is found liable to the plaintiff because of fraud, he or she cannot avail themselves of any reduction in responsibility by reason of proportionate liability.

4.5 Section 260 of the Major Transport Project Facilitation Act excludes the proportionate liability provisions of the Wrongs Act from specific major transport projects.

5 Failure to take reasonable care

5.1 In the Victorian legislation, the trigger for proportionate liability is “an action for damages … arising from the failure to take reasonable care”. This trigger is not the same in all jurisdictions. For example, section 28 of the Civil Liability Act 2003 in Queensland describes the trigger as “an action for damages arising from the breach of a duty of care”.

5.2 A number of cases have dealt with the meaning of “failure to take reasonable care” and when a claim is said to arise from “a failure to take reasonable care”.

5.3 The earlier decisions were divided. Some judges found that a claim arises from a failure to take reasonable care when such failure was alleged or was a necessary element in the claim against the wrongdoer/s.

5.4 Under this interpretation, a claim in negligence, being a claim for loss arising from a failure to exercise the requisite standard of care would be a claim arising from a failure to take reasonable care. On the other hand, a claim for payment under a guarantee would not be apportionable because it is not alleged that a guarantor has failed to take reasonable care: Commonwealth Bank of Australia v Witherow [2006] VSCA 45.

5.5 This literalist approach resulted in claimants carefully drafting their pleadings to remove any reference to a failure to take reasonable care. This approach favoured form over substance. The other approach was more practical in the implementation of proportionate liability.

5.6 The issue arose before Hollingworth J in Woods v De Gabriele [2007] VSC 177. The case concerned the collapse of the Westpoint group of companies. Mr Woods sought to recover financial losses by suing those responsible for providing him with poor investment advice. The action was brought against three defendants. Two of those defendants sought to join another company alleging that it was a concurrent wrongdoer. This “new” company was insolvent.

5.7 Mr Woods afraid of having his judgment diluted by the inclusion of an insolvent company opposed the joinder and sought to change the basis of his claim by removing claims for misleading and deceptive conduct under the Fair Trading Act 1999 and seeking to replace them with other contraventions of the Fair Trading Act. Mr Woods also sought to amend his claim based on breach of contract by removing references to any contractual duty of care or any failure to exercise reasonable care.

5.8 Justice Hollingworth said that notwithstanding an elaborate choice by Mr Woods to avoid pleading any claim that would trigger proportionate liability the claim was to be regarded as an apportionable claim anyway. Her Honour said:

“It is at least arguable that a claim should be regarded as an apportionable claim under … the Wrongs Act, if the facts on which the claim is based include allegations of a failure to take reasonable care, whether or not the plaintiff chooses to give it that name …”

5.9 Three years earlier, Justice Middleton of the Federal Court was also required to review the Victorian proportionate liability regime in the case of Dartberg Pty Ltd v Wealthcare Financial Planning Pty Ltd [2007] FCA 1216.

5.10 In the course of his decision, Justice Middleton observed that the proportionate liability regime in Victoria did not require that the claim be one in negligence or one for breach of duty; the legislation only required that the claim arise from the failure to take reasonable care. Justice Middleton stated:

“Even though the claims in this proceeding do not rely upon any plea of negligence or a ‘failure to take reasonable care’ in a strict sense, a failure to take reasonable care may form part of the allegations or the evidence that is tendered in the proceeding. At the end of the trial, after hearing all of the evidence, it may be found that Part IVAA applies.”

5.11 In 2008, the New South Wales Supreme Court considered the same issue in Reinhold v New South Wales Lotteries Corporation (No 2) [2008] NSWSC 187. The Reinhold case dealt with an Ozlotto bungle. In September 2007, Mr Reinhold attended his local newsagency to buy a ticket in a special $2 million Ozlotto draw. The ticket generated by the computer terminal was incomplete, in that it did not include a serial number or bar code.

5.12 The newsagent noticed the defect in the ticket and called the Lotteries helpline. While the first newsagent was on the phone, a second newsagent printed a ticket for Mr Reinhold at a second terminal and received Mr Reinhold’s payment for that ticket. Mr Reinhold left the newsagency and went home with the second ticket.

5.13 That evening, Mr Reinhold’s ticket included all six winning numbers making him a Division One winner. However, when he returned to the newsagent and scanned his ticket, it did not record any prize.

5.14 An investigation revealed that the ticket provided to Mr Reinhold had been cancelled before the draw. The circumstances of the cancellation were controversial but it appeared that when the newsagent called the Lotteries helpline, she was advised to cancel the first ticket using the ticket serial number. But as no serial number was printed, she was provided a number to input into the relevant terminal. It appears that the number she was provided was the serial number for the second ticket that was sold to Mr Reinhold. Accordingly, Mr Reinhold’s “winning” ticket was cancelled before the draw occurred.

5.15 In the Reinhold case, Mr Reinhold argued that the proportionate liability scheme in New South Wales did not apply because the relevant contractual term on which he relied was concerned with whether the ticket had been cancelled in accordance with the rules. Barrett J. rejected this submission and said the following:

“These things can be judged only after the loss or damage and its cause have been identified through a process of fact finding and analysis. Viewed in prospect and in its pending state, a claim might allege an intentional or fraudulent act or omission, but it is impossible to say, at that point, whether any loss or damage was caused and, if it was, what caused it – in particular, whether it was intentionally caused or fraudulently caused.

On this basis, the nature of a ‘claim’ for the purposes of Part IV, will be determined by what the court has decided in the case, not by what might be prayed or pleaded in an initiating process or points of claim. In short, ‘claim’ refers to a claim as proved and established, not a claim as made or advanced.”

5.16 The view that a determination of a “failure to take reasonable care” depends on an analysis of the evidence and proven facts rather than the manner in which claims are selected, framed and articulated received the support of the Victoria’s Court of Appeal in Godfrey Spowers (Victoria) Pty Ltd v Lincoln E Scott Australia Pty Ltd [2008] VSCA 208 and the Victorian Supreme Court decision in Solak v Bank of Western Australia [2009] VSC 82.

5.17 It now seems to be established practice that courts and tribunals will look at the underlying facts of a case, in determining whether a particular claim is apportionable.

6 Statutory warranties and proportionate liability

6.1 We are familiar with section 8 of the Domestic Building Contracts Act 1995 which implies in every domestic building contract a number of warranties concerning the relevant building work. Section 9 of the Act provides that these warranties run with the building for the benefit of subsequent purchasers.

6.2 There are six warranties set out in section 8 and only the fourth warranty refers to work being carried out with “reasonable care and skill”. In none of the remaining five warranties is there a reference to “reasonable care”. The question for consideration is whether a claim based on any warranty that does not refer to the builder exercising reasonable care gives rise to an apportionable claim?

6.3 For example, are claims for breach of the following warranties apportionable?

(a) that the builder will supply all material in good condition and that it is suitable for the purpose for which it is used and otherwise is new

(b) that work will be carried out in accordance with and comply with all laws and legal requirements, or

(c) the work will be suitable for occupation at the time it is complete.

6.4 The issue has been the subject of heated debate in Victoria. There are authorities supporting each side of the debate. For example, Serong v Dependable Developments [2009] VCAT 760, Spiteri & Ors v Stonehenge Homes & Associates [2011] VCAT 2267 and L U Simon v Allianz Australia Insurance [2013] VCAT 468

6.5 It is noteworthy that in New South Wales, the Civil Liability Act at section 34(3A) provides that the proportionate liability provisions do not apply to a claim for breach of a statutory warranty under the Home Building Act 1999. (I note that the NSW warranties do not include a warranty that the builder will exercise reasonable care). Would it be presumptuous to say that the absence of a similar exclusion in the Victorian legislation suggests that our parliament did not intend to exclude breach of statutory warranties from the proportionate liability regime?

6.6 In a paper presented to the Judicial College of Victoria in May 2006 entitled Proportionate Liability – Some creaking in the superstructure, Justice Byrne seemed to be of the view that breach of warranties and breach of implied terms in supply contracts that did not allege either misleading or deceptive conduct or a failure to take reasonable care were not apportionable claims. Consistent with this view, his paper emphasises the importance of full articulation of claims and proper pleadings. He says:

“If the court is to apportion the responsibility between identified persons, what factors is to have regard to? I have in Aquatec – Maxcon Pty Ltd v Barwon Region Water Authority (No 2) taken the position that litigants, and not the court own the litigation. It is for the parties to raise the issues which they wish determined and that they do so with sufficient particularity to enable the court to determine questions of relevance and to enable the parties to know what is put against them. This has two consequences, if a matter is not raised on the question of responsibility, it is not for the court to seek it out; and, second, the parties must by their pleading or otherwise raise these matters.

The strategy which I recommend is that the parties be required to articulate precisely what it is that they allege. This will present difficulties in tribunals where parties are often self-represented and where informality is encouraged.”

6.7 In Lawley v Terrace Designs Pty Ltd [2006] VCAT 1363, Senior Member Young was asked to apportion responsibility in a multi-party domestic building dispute.

6.8 Senior Member Young, partly relying on Justice Byrne’s 2006 paper on the subject, determined that the claim against the builder under the statutory warranty (requiring the builder to carry out the work with reasonable skill and care) was not apportionable. He said the following:

“The owners plead breaches of the statutory warranties alleging, inter alia, a breach of the warranty that the builder would carry out the work with reasonable skill and care. Does this mean the owners’ contractual claims against the builder becomes apportionable claims? I do not consider that this can be the case. The owners’ claims against the builder is contractual, the gist of the action is a breach of contract not a failure to take reasonable care.”

6.9 This was a bold statement by the Senior Member. His views were not shared by Justice Byrne. In fact, Justice Byrne who heard the appeal of Senior Member Young’s decision said the following on this issue:

“The tribunal noted that one of the statutory warranties relied on by the owners was that ‘the builder would carry out the work with reasonable care and skill’. It nevertheless concluded that this was not an apportionable claim, that is, it was not ‘a claim … (whether in tort, in contract, under statute or otherwise) arising from a failure to take reasonable care’. This conclusion was not challenged before me and nothing turns upon this. I would not, however, like to think that my silence should be taken as an indication that I share this view.”

6.10 The reference to “..an action for damages (..in contract…)” in the definition of apportionable claims would suggest that Senior Member Young’s view cannot be correct.

6.11 I believe that depending on the underlying facts, statutory warranties are apportionable. In forming this view I note that such warranties are not excluded from the proportionate liability regime.

6.12 In deciding whether a claim arises “from a failure to take reasonable care”, consideration should be given not only to the claim as pleaded but also to the underlying facts as proven at the hearing. If the underlying facts indicate the claim arises from a failure to take reasonable care or (misleading and deceptive conduct) then that claim is apportionable.

6.13 The term “arising from” is traditionally interpreted quite widely The reference to a claim “arising from” the failure to take reasonable care in section 24AF of the Wrongs Act suggests that the proportionate liability provisions are to be given a broad application. .

6.14 In forming this view, the writer relies on the authorities set out between paragraphs 3.6 and 3.16 above

6.15 This view is consistent with the motivation behind the proportionate liability regime which was to provide insurers with an assurance that liabilities and damages in our system are allocated justly and equitably. A strict or narrow interpretation of what is an apportionable claim runs contrary to this view.

6.16 .This view does place wrongdoers in a quandary if to benefit from proportionate liability they need to demonstrate they failed to take reasonable care.

7 Loss and Damage

7.1 In s.24AF of the Wrongs Act, an apportionable claim is partly defined as follows:

“(a)​A claim for economic loss or damage to property in an action for damages (whether in tort, in contract, under statute or otherwise) arising from a failure to take reasonable care…”

7.2 Prior to the High Court decision in Hunt & Hunt Lawyers v Mitchell Morgan Nominees [2013] HCA 10, there was uncertainty as to what “loss or damage” was regulated by the proportionate liability legislation.

7.3 In St George Bank Limited v Quinerts Pty Ltd (2009) 25 VR 666. Victoria’s Court of Appeal was confronted with a bank seeking to recover loan monies following default by the borrower. The Quinerts case involved a loan secured by a mortgage over property that a valuer (Quinerts) had negligently overvalued. The borrower defaulted and the property obtained a price well below the amount of the bank’s advance. Quinerts sought to reduce the judgment against it with reference to the comparative responsibility of the borrower and guarantor. The question that was considered by the Court of Appeal was whether Quinerts’ defence of proportionate liability related to the same loss and damage that was sought from the borrower and guarantor.

7.4 The Court was asked to apportion liability between the borrower, and the guarantor, on the one hand and the valuer, on the other. The court declined to do so. His Honour Nettle JA said the following,

“The loss or damage caused by the borrower and the guarantor was their failure to repay the loan. Nothing which Quinerts did or failed to do caused the borrower or the lender to fail to repay the loan. The damage caused by Quinerts (the valuer) was to cause the bank to accept inadequate security from which to recover the amount of the loan. Nothing which the borrower or the guarantor did or failed to do caused the bank to accept inadequate security for the loan.”

7.5 The court declined to apportion liability because the loss or damage caused by the borrower and the guarantor was held to be different to the loss or damage caused by the valuer.

7.6 The Mitchell Morgan case arose from a fraud committed by a boxing promoter on his business partner. In 2005, Mr Vella and Mr Caradonna agreed to promote the upcoming fight between Anthony Mundine and Danny Green. For the purpose of this business venture they opened a joint account with the ANZ Bank.

7.7 At the same time, Mr Vella confided to Mr Caradonna that he wished to consolidate loans in respect of three properties he owned at Enmore, Leppington and Mangrove Mountain. He sought Mr Caradonna’s advice about potential lenders. Accordingly, on the same day they opened their joint account, they attended together upon Mr Vella’s solicitor and obtained the relevant Certificates of Titles which were held by him.

7.8 The loan consolidation did not proceed but Mr Caradonna used Mr Vella’s Certificates of Title, unknown to Mr Vella, to borrow money for his own purposes.

7.9 One transaction involved Mr Caradonna borrowing more than $1million from Mitchell Morgan and securing the loan by mortgage on the Enmore property. Mr Caradonna forged Mr Vella’s signature. He was assisted by his cousin, a dishonest solicitor, Lorenzo Flammia, who dealt with Mitchell Morgan’s solicitors, Hunt & Hunt and represented to them that the documents had been signed before him by Mr Vella.

7.10 When the fraud was discovered and Mitchell Morgan sought to recover its money there were three parties who were liable to it. Mr Caradonna and Mr Flammia were each liable to Mitchell Morgan for their fraudulent dealings. Hunt & Hunt was liable for negligently failing to ensure that Mitchell Morgan had security of the Enmore property for the loan money.

7.11 Hunt & Hunt claimed that any judgment against it should be reduced to take into account the comparative responsibility of the fraudsters. Naturally, this would have been a disastrous outcome for the Mitchell Morgan.

7.12 Drawing some support from the Quinerts case, the New South Wales Court of Appeal held that Hunt & Hunt were not entitled to rely on the defence of proportionate liability as the loss and damage they caused Mitchell Morgan was different to the loss and damage caused by the fraudsters. They found Hunt & Hunt 100% liable for the loss.

7.13 The High Court rejected this approach.

7.14 The majority said this on the issue,

“In the identification of the damage or loss that is the subject of the claim, it is necessary to bear in mind that damage is not to be equated with what is ultimately awarded by the court, which is to say the “damages” which are claimed by way of compensation and which are assessed and awarded for each aspect of the damage suffered by a plaintiff. Damage, properly understood, is the injury and other foreseeable consequences suffered by a plaintiff. In the context of economic loss, loss, damage may be understood as the harm suffered by a plaintiff’s economic interests.”

7.15 The High Court did not approve the decision in Quinerts case. It indicated that courts should focus not so much on the cause of loss but rather, the harm which results from it. The High Court stated that loss or damage in the context of economic loss was the harm suffered by the plaintiff’s economic interests and in this instance, represented Mitchell Morgan’s inability to recover the loan money. Accordingly, the fraudsters and solicitors could be treated as concurrent wrongdoers in respect of this loss and Hunt & Hunt enjoyed an apportionment of 12.5%.

7.16 The very practical approach adopted by the High Court is intended to give proportionate liability significant coverage and application.

8 Concurrent wrongdoers

8.1 What is a concurrent wrongdoer in the proportionate liability regime?

8.2 The definition at section 24AH of the Act is not helpful. It provides:

“A concurrent wrongdoer, in relation to a claim, is a person who is one of two or more persons who acts or omissions caused, independently of each other or jointly, the loss or damage that is the subject of the claim.”

8.3 The definition suggests that causation alone determines who is or is not a concurrent wrongdoer. However, the true answer lies somewhere beyond causation.

8.4 To find an answer to our question we must travel to Katherine in the Northern Territory and meet with Mr and Mrs Shrimp.

8.5 The Shrimps owned and operated Edith Springs Station 50 kilometres northwest of Katherine. One of the main activities at the station was growing and harvesting hay. In 2004, the Shrimps bought 400 kilograms of jarra grass seed from Landmark and used it to sow 460 hectares.

8.6 At harvest time, the Shrimps came to learn that were supplied with summer grass seed and they sustained substantial losses. They sued Landmark alleging among other things, misleading and deceptive conduct.

8.7 Landmark brought claims from the parties who supplied the seed to it and represented it was jarra grass seed. They, in turn, brought claims against their suppliers and the laboratories that had tested the seed and certified it as jarra grass seed, and so on.

8.8 In 2006, the Shrimps applied for a separate trial of their issues. They wished to quarantine their dispute from the larger dispute that had developed between the many joined parties. The joined parties objected and one of their submissions was that all issues needed to be tried together as the Shrimps’ claim was apportionable.

8.9 In Shrimp v Landmark Operations Limited [2007] FCA 1468, Besanko J of the Federal Court had to identify the concurrent wrongdoers under the proportionate liability legislation. The court said

“The above references suggest that the mischief to which the amendments were directed was a plaintiff being able to recover 100 per cent of his damages from any one of several wrongdoers when that wrongdoer’s “fault”, when compared with the other wrongdoers, was less or far less than that. In other words, the amendment was directed to what were considered to be the undesirable consequences of the joint and several liability rule. There is no suggestion that the mischief the amendments were designed to remedy was any wider than that. The definition of concurrent wrongdoer seems to be the critical subsection and, in my opinion, the word “caused” in s 87CB(3) should be read as meaning such as to give rise to a liability in the concurrent wrongdoer to the plaintiff or applicant.”

8.10 The Shrimp case established, perhaps for the first time, that a concurrent wrongdoer must not only cause the loss claimed by the plaintiff, but it must have a legal liability to compensate the plaintiff in respect of that loss.

8.11 In 2010, His Honour Judge Shelton was confronted with this issue in Bevendale Pty Ltd v Equiset Construction [2010] VCC 805.

8.12 The case arose from the construction of the Epping Plaza Regional Shopping Centre. In 2008, a structural steel truss and four concrete wall panels constructed by the defendant fell causing damage to the shopping centre. The plaintiff alleged the incident arose as a result of the defendant’s failure to properly erect the structural steel truss.

8.13 The defendant alleged that the incident occurred because the structural steel truss was poorly attached to the concrete panels by its subcontractor. The defendant sought to join the subcontractor as a concurrent wrongdoer to the proceeding.

8.14 The plaintiff successfully contested the joinder on the basis that the subcontractor had no legal liability to the plaintiff. The joinder application was dismissed.

8.15 The logic of Judge Shelton’s decision is irrefutable. One of the consequences of proportionate liability is that defendants are forever searching for concurrent wrongdoers with whom to share liability. Proceedings are often disrupted by joinder applications followed by further joinder applications.

8.16 A plaintiff’s natural response to such joinders is to assess its rights against the joined parties (new defendants) and bring its own claim against these defendants. Such claims by plaintiffs are necessary if a plaintiff hopes to recover 100% of its judgment. A plaintiff who does not bring a claim against a concurrent wrongdoer runs the risk of not being awarded damages in respect of that concurrent wrongdoer.

8.17 Although not expressed in the definition of a concurrent wrongdoer in the legislation, an underlying assumption of the proportionate liability regime is that a concurrent wrongdoer must have a legal liability to the plaintiff. The “wrong” in “wrongdoer” must be a legal wrong. If this were not the case, then damages would be apportioned to defendants against whom a plaintiff had no recovery rights. This is not the intention of the proportionate liability regime.

8.18 In property damage claims, it would not be too difficult to establish that a concurrent wrongdoer owed a duty of care to the owner of the damaged property. However, in economic loss claims establishing a duty of care may not be straightforward.

8.19 There are circumstances where a plaintiff does not have recovery rights against a concurrent wrongdoer but proportionate liability still applies.

8.20 Generally speaking, these are cases where the plaintiff has relinquished its rights against concurrent wrongdoers. By way of example, a plaintiff may have released a party from liability. Another example is a plaintiff that has allowed a limitations period to expire against a concurrent wrongdoer.

8.21 This latter situation confronted Her Honour Judge Jenkins in Adams v Clark Homes [2015] VCAT 1658. The Adams case concerned a domestic building dispute brought by an owner against the builder. The proceeding was commenced with three and a half months left before the ten year limitation period expired. In that period, the builder joined the plumber and the architects as concurrent wrongdoers.

8.22 After the expiration of the limitation period, the owners sought to bring claims against these new joined parties but their application was statute barred. Despite the plaintiffs’ inability to recover damages from these parties they remained concurrent wrongdoers for apportionment purposes.

8.23 The definition of concurrent wrongdoer is a party that causes a loss for which it is legally liable even if an act or omission by the plaintiff has extinguished that party’s liability to the plaintiff.

9 Indemnities

9.1 Concern has been expressed that proportionate liability may undermine the ability of parties to allocate risk between themselves in their contractual arrangements. For example, if a contractor grants an indemnity to a principal, will this indemnity be honoured by the court or could it be subject to the provisions of proportionate liability? Similarly, if indemnities are provided between concurrent wrongdoers, will the court uphold the indemnities or will the respective liabilities of concurrent wrongdoers be subject to proportionate liability?

9.2 In Victoria there is no certain answer to these questions. Section 42AJ of the Wrongs Act provides as follows:

“Despite anything to the contrary in Part IV a defendant against whom judgment is given under this Part as a concurrent wrongdoer in relation to an apportionable claim

(a) cannot be required to contribute to the damages recovered or recoverable from another concurrent wrongdoer in the same proceeding for the apportionable claim; and

(b) cannot be required to indemnify any such wrongdoer”.

9.3 Interestingly, in the Northern Territory, Tasmania and Western Australia, indemnities are excluded from the operation of the proportionate liability scheme. The relevant legislation in these jurisdictions reads as follows or to this effect:

“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”.

9.4 There has been extended debate as to whether the Victorian Parliament intended to override or dilute the effect of indemnities in contracts in the jurisdiction.

9.5 In 2005, the Victorian Department of Justice issued a Discussion Paper entitled, “Review of Contractual Allocation of Risk and Part IVAA of the Wrongs Act 1958”. In this Paper, the Department appeared to favour a flexible view on the allocation of risk,

“The advantage of this option is that it is conceivable that in some cases a concurrent wrongdoer should be found liable to a greater or lesser extent than precisely what their contract stipulates. Arguably, the court should have a discretion to override contractual liability (to some extent) or at least apply a flexible approach to cases where there is a manifest discord between contractual allocation of risk and a defendant’s “moral responsibility for causing a loss”.

9.6 Earlier in 2005 Graeme Uren QC and Daniel Aghion of the Victorian Bar in their paper Proportionate Liability: An analysis of the Victorian and Commonwealth Legislative Schemes, said the following on this issue:

“It seems unlikely that Parliament would have intended to so drastically affect a party’s commercial bargain. It also seems to be counter to the policy behind the legislation of responding to the perceived “insurance crisis”. One of the ways in which commercial parties arrange their affairs is to require parties contracting with them to provide a full indemnity and to carry insurance for any loss. Why would the legislation cut across that arrangement, thereby increasing the risk of creating an uninsured defendant?”

9.7 No doubt a concern held by Uren and Aghion was that a failure to uphold a contractual allocation of risks casts unwanted uncertainty over commercial arrangements and encourages those parties who have provided indemnities to litigate disputes in the hope of reducing their liabilities.

9.8 I have three observations in respect of this view. Firstly, if the Victorian Parliament did wish to protect a party’s commercial bargain, why then did it not legislate to exclude indemnities from the proportionate liability regime, as has occurred in other jurisdictions?

9.9 Secondly, is the presence of indemnities in commercial arrangements the product of arm’s length negotiations or rather, the product of an imbalance in bargaining positions between parties? If the latter, then the undermining of indemnities by the proportionate liability scheme would be consistent with the response to the insurance crisis.

9.10 One way of preserving the “commercial bargain” struck between parties is to permit them to contract out of the proportionate liability regime.

9.11 Thirdly and interestingly, not only has Victoria not excluded indemnities from the proportionate liability regime but it also does not permit “contracting out” of the proportionate liability regime. This is to be contrasted with the situation in New South Wales, Western Australia and Tasmania which do permit contracting out. .

9.12 In search for an answer, some commentators have closely examined section24AJ with a view to limiting its operation. Some commentators have observed that contribution and indemnity cannot be sought by “a defendant against whom judgment is given”. Accordingly, they suggest that contribution and indemnity rights are relevant at any time before judgment is entered in a proceeding.

9.13 Other commentators have indicated that the provision relates to contribution and indemnity rights between defendants but not indemnity and contribution rights between a plaintiff and a defendant.

9.14 I personally do not have an answer to these questions.

9.15 In my view, the Victorian proportionate liability regime will tend to undermine and erode indemnity rights

9.16 Notwithstanding my views, in reality, the picture is not so grim. As explained earlier, a concurrent wrongdoer must cause loss to the plaintiff for which it is legally liable. This test would exclude many parties in a construction project from being concurrent wrongdoers towards a principal.

9.17 In Aquatec-Maxcon Pty Ltd v Barwon Regional Water Authority (no. 2) [2006] VSC117, Justice Byrne was presented with a dispute arising from so called “cascading contracts”. The claim arose from defective sewerage treatment ponds constructed at Lorne and Apollo Bay for Barwon Water by Aquatec-Maxcon. Aquatec’s expertise lay in the mechanical aspects of the proposed treatment plants and it subcontracted the remainder of the work to an engineering construction contractor. They, in turn, subcontracted the design to a civil design engineer, who, in turn, subcontracted part of its work to a design engineer who, (finally), engaged a geotechnical engineer.

9.18 The parties entered the trial of the proceeding with the view that should Barwon Water succeed in its claim, its damages would be apportioned between the various contractors and subcontractors/consultants (concurrent wrongdoers).

9.19 However, Justice Byrne held a different view. He found that each party had entered into contractual arrangements with “downstream” parties and that such arrangements precluded the downstream parties from owing a duty of care to Barwon Water. Accordingly, liability in the case followed the respective contracts. There was no apportionment of liability between defendants. The terms of each contract were upheld by the court.

9.20 I suspect that in most commercial projects the principles identified in the Aquatec-Maxcon case will apply and the proportionate liability regime will not interfere with contractual rights. Different considerations will apply if the plaintiff’s claim alleges property damage. Courts are more likely to find a duty of care is owed by downstream parties in property damage cases.

10 Additional reading

Tony Horan – Proportionate Liability: Towards National Consistency – September 2007 (The writer is indebted to Tony Horan of the Victorian Bar who gave generously of his time over one lunchtime to discuss some of the issues raised by this paper. In the writer’s opinion Tony is and remains the leading authority on this subject. Any insights found in this paper should be attributed to him. Any errors are of my own making.)

Owen Hayford – Proportionate Liability – Its impact on contractual risk allocation (2010) 26 BCL 11

Michael Whitten – Recent Developments in Proportionate Liability – 30 August 2012

Peter Megens and Beth Cubitt – Contract or Conflict? An overview of the proportionate liability regime and its difficulties – June-August 2009 Commercial Law Quarterly 3

Graeme Uren QC and Daniel Aghion Proportionate Liability: An analysis of the Victorian and Commonwealth Legislative Schemes,

MJA

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