Proportionate liability in Victoria: what a consultant should check

Proportionate liability limits you to your own share of a loss. Where it applies, a consultant who contributed ten per cent of the problem is liable for ten per cent, not for all of it because the builder has since folded. Some consultancy agreements try to exclude it. Whether they can, and what happens if they do, depends on the jurisdiction.

What does proportionate liability actually do?

It answers a question that matters enormously and gets very little attention at signing: when several parties contribute to a loss, who carries the shortfall if one of them cannot pay?

Without proportionate liability, the answer can be whoever is still solvent and insured. That is frequently the consultant, because consultants carry professional indemnity cover and hold it long after the builder has moved on. With proportionate liability, each party's share is assessed and you carry yours.

The practical effect only shows up when something has already gone wrong and one of the other contributors has disappeared. That is exactly when nobody is inclined to be reasonable.

What happens if the agreement tries to exclude it?

Whether an exclusion actually works is a legal question, it varies between Australian jurisdictions, and it is one to put to a construction lawyer rather than settle from a guide. What does not vary, and what you can act on today, is the commercial position.

An exclusion of proportionate liability transfers other parties' insolvency risk onto you, at no additional fee, and your professional indemnity insurer did not price for it.

That argument stands regardless of how the legal question resolves, which is what makes it the right one to run in a negotiation. If the exclusion turns out to be unenforceable, you have lost nothing by having it removed. If it turns out to be enforceable, you have removed something that could have cost you the entire claim.

So the practical sequence is: treat the clause as effective, negotiate it out on commercial grounds, and if the client will not move and the commission is significant, get advice on that specific clause rather than on the whole agreement.

Where does the clause usually hide?

Rarely near the liability cap, which is where you would look for it.

It tends to appear in general provisions, in a miscellaneous clause towards the back, or inside a definitions section that quietly makes liability joint and several. Sometimes it is a single sentence saying the parties agree that a particular statutory regime does not apply to the agreement.

Wording worth flagging when you see it:

• the parties agree that [regime] does not apply
• liability is joint and several
• to the fullest extent permitted by law, the parties contract out of
• each party is liable for the whole of any loss

What is the difference between this and a liability cap?

They are often confused, and they solve different problems.

The last row is the one worth carrying into a negotiation. Both regimes were in the background when your premium was set. Removing one of them changes the risk your insurer underwrote without your insurer being asked.

Does the position differ between states?

Yes, and it is the reason a clause that was fine on your last project may not be fine on this one.

Each Australian state and territory has its own proportionate liability regime, and they do not agree with each other on the questions that matter most to a consultant: whether parties can contract out, what kinds of claim are covered, and how a defendant must deal with other responsible parties who are not before the court.

The practical consequence is that governing law is not a boilerplate question. A consultancy agreement for a project in one state, governed by the law of another, may sit under a different regime from the one you assumed. Read the governing law clause before you form a view about the proportionate liability clause, because the second depends on the first.

If you work across borders, treat "we accepted this last time" as the weakest reason to accept it again.

What does your insurer think about it?

More than most consultants realise.

Professional indemnity premiums are set against an assumption about the liabilities you carry. A regime that limits you to your own share of a loss is part of the background against which that assessment was made. Agreeing to set it aside changes the risk your insurer underwrote, on a commission they have not seen.

Most policies contain some obligation not to assume liabilities beyond those you would have at general law, or to notify circumstances that increase risk. The wording varies and the consequences of getting it wrong vary with it, from an argument at claim time to a declined claim.

This is not a reason to panic about every agreement. It is a reason to raise significant exclusions with your broker at the time rather than at the claim, and to keep the email. A broker told in advance is an ally. A broker told afterwards is a witness.

How does it interact with your liability cap?

They are frequently negotiated by different people at different times, and the interaction is where consultants get caught.

A cap set at your insurance limit looks like complete protection, and against a small claim it is. Against a large claim where proportionate liability has been excluded, it protects you only down to the cap, and the cap may be well above your share of the loss.

The order to think about it in is: first, what share of the loss can I be pursued for; second, what is the ceiling on that amount. A negotiation that wins the second and gives away the first has moved backwards.

A worked example

Return to the sample review commission: a Victorian consultancy agreement, fee $180,000, professional indemnity cover of $10 million.

Assume a defect claim of $4 million where responsibility is later assessed as sixty per cent to the builder, thirty per cent to a subcontractor and ten per cent to the consultant. Where proportionate liability applies, the consultant's exposure is $400,000.

Now assume the builder has been wound up and the subcontractor is uninsured, and the agreement excluded proportionate liability. The consultant's exposure is the whole $4 million, subject only to whatever cap survives. If the cap is set at the $10 million policy limit, the cap does not help at all. The claim is under it.

Ten per cent of the responsibility, one hundred per cent of the loss. The fee was $180,000.

That is the entire argument, and it is worth putting in exactly those terms.

What to ask for

The simplest position is deletion:

Delete clause [x]. The Consultant does not agree to exclude or modify the operation of any proportionate liability regime that would otherwise apply.

If deletion is refused, narrow it so it cannot reach beyond your own conduct:

The Consultant's liability under this Agreement is limited to that proportion of the loss for which the Consultant is responsible, having regard to the responsibility of any other party.

And the covering note, which is the part that actually moves people:

Excluding proportionate liability asks us to carry other parties' insolvency risk on a $[fee] commission. Our professional indemnity cover is priced on the basis that the regime applies. We are not able to accept the transfer, and our insurer would need to be notified if we did.

Mentioning the insurer is not a bluff and should not be used as one. If you are asked to accept an exclusion on a significant commission, telling your broker is the right thing to do regardless of the negotiation.

Where this stops being general

Knowing what the clause does is the easy half. Finding it is the other half, because it is rarely labelled, rarely near the liability provisions, and frequently drafted as a definition rather than an obligation.

That is the work that remains, and it is specific to the agreement in front of you.