November 2006

When more is less - the rise of proportionate liability

Until recently, as a general rule the greater the number of potential defendants to an action the greater the likelihood of a full recovery. This was because a successful plaintiff suing multiple (concurrent) defendants in actions involving negligence could recover all of its damages from any one defendant, even if other defendants were also responsible for the plaintiff’s loss.

In practice, this meant that if two defendants had negligently caused a total loss of $100,000 to the plaintiff, but only one of the defendants had the resources to pay, that unsuccessful defendant might be ordered to pay the entirety of the $100,000, even if the other (impecunious) defendant was equally responsible for the damage. This state of affairs was clearly advantageous to plaintiffs.

The passage of the Civil Liability Act 2002 (NSW) and related legislation at a Federal level has dramatically reduced the operation of the "joint and several liability" principle outlined above, by substantially expanding the operation of "proportionate liability".

What is proportionate liability under the Act?

Under proportionate liability, the liability of a defendant who is a concurrent wrongdoer is limited to an amount reflecting that proportion of the loss or damage which the Court considers to be "just" having regard to the extent of that defendant’s responsibility for the damage or loss.

To use the above example, if the Court determined that the defendants were equally responsible for the losses suffered by the plaintiff, the solvent defendant might be ordered to pay only $50,000 of the total damages of $100,000 (50%). The plaintiff would then be left without a remedy for the balance because the other defendant has no assets from which to recover payment.

To what actions does it apply?

Proportionate liability applies to:

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

  2. claims for economic loss or damage to property in an action for damages under the Fair Trading Act 1987 (NSW) arising from "conduct that is misleading or deceptive, or likely to mislead or deceive" (section 42).

The proportionate liability provisions therefore apply to a wide range of common commercial actions, such as negligence and misleading and deceptive conduct claims against lawyers, accountants and building professionals.

Exclusions from the operation of the proportionate liability provisions

The proportionate liability provisions do not apply in respect of civil liability that arose before 24 July 2004, or in respect of proceedings commenced in a Court before 1 December 2004. Claims when the wrongdoer deliberately caused the loss or damage, or when the wrongdoer fraudulently caused the loss or damage, are also exempted from the application of the proportionate liability provisions.

Perhaps most significantly, where their relationship is governed by a contract, the parties can agree to modify or even exclude the operation of the proportionate liability provisions of the Act.

Proportionate liability for actions arising from Commonwealth Legislation

Proportionate liability has also been introduced in relation to causes of action for misleading and deceptive conduct available under the Corporations Act 2001, the Australian Securities and Investments Commission Act 2001 and the Trade Practices Act 1974. This includes conduct in contravention of section 52, which is widely used as a cause of action in civil proceedings.

The requirements for the operation of, and exceptions to, proportionate liability under the Commonwealth legislation are similar, but not identical, to those applying under the Act.

What this means for the parties to litigation and commercial contracting

Where proportionate liability applies, the risk for a plaintiff is twofold;

  1. if it fails to join all of the parties responsible for its losses, it will not be awarded the entirety of the damages sought by it, despite successfully proving liability against the defendant(s) it does sue; and

  2. even if a plaintiff does join all of the parties responsible for its losses, it will only be able to recover that proportion of its total loss for which the Court has assigned responsibility to the solvent defendant(s).

Conversely, defendants are now able to limit their liability in claims where proportionate liability applies by convincing the Court that others are partly to blame for the plaintiff’s losses.

Because proportionate liability is capable of being modified or excluded by agreement, the effect of proportionate liability in the event of a dispute (and litigation) is another consideration that parties should take into account when drafting commercial contracts.

In the construction industry for example, a head contractor wishing to sue a subcontractor for a failure to take reasonable care in breach of its sub-contract under the principles of joint and several liability would therefore want to include a provision excluding the operation of the Act. A subcontractor however would be benefited by the application of proportionate liability principles and would be well advised to resist the inclusion of such a clause in the sub-contract.

Our expertise