QLD CONSTRUCTION ALERT: Contracting out of proportionate liability in Queensland – terms that might offend the statutory prohibition

24 May 2017

Publications

Introduction

There remains a degree of uncertainty in the construction industry in relation to the reach of the proportionate liability regime contained in the Civil Liability Act 2003 (Qld) (CLA).   Despite the number of years that have elapsed since its enactment, little case law has emerged that might offer unequivocal guidance.

To compound the uncertainty further, in Queensland (unlike most other state jurisdictions) section 7(3) of the CLA expressly prohibits parties from contracting out of the proportionate liability regime.  Section 7(3) states:

This Act, other than chapter 2, part 2 [the proportionate liability regime] and chapter 3, does not prevent the parties to a contract from making express provision for their rights, obligations and liabilities under the contract (the express provision) in relation to any matter to which this Act applies and does not limit or otherwise affect the operation of the express provision.

Essentially this prohibits parties from making express provision for their rights where those provisions have the effect of avoiding the proportionate liability regime.

What constitutes contracting out in Queensland?

Some commentators argue that a contractual term which alters a party’s liability from the neutral common law position (for example, by way of an indemnity or warranty) may amount to contracting out and will inevitably be unenforceable by virtue of section 7(3).  This argument is based on the proposition that an indemnity or warranty allocates risk and liability to one specific party and thereby sidesteps the Court’s apportionment process.

In our opinion, this approach to the prohibition on contracting out is extreme and unfeasible.  Section 7(3) is limited and only applies in circumstances where the proportionate liability regime is engaged i.e. where there is an apportionable claim.  This update will consider the inherent limitations of section 7(3) and the extent to which parties to a construction contract remain free to negotiate and make provision for their rights, liabilities and obligations.

What is an apportionable claim?

Section 28(1) of the CLA defines an apportionable claim as including “a claim for economic loss or damage to property in an action for damages arising from a breach of duty of care”. “Duty of care” is further defined as a duty to take reasonable care or to exercise reasonable skill.  Importantly, a “duty” can include a duty of care under contract, but only if it is concurrent and coextensive with a duty of care in tort.  Where there is an apportionable claim and more than one wrongdoer, the Court will apportion liability between the wrongdoers according to their responsibility for the damage.

The Queensland proportionate liability regime has a comparatively narrow scope in comparison to other jurisdictions where the definition of “apportionable claim” has a wider ambit.  For example, in New South Wales and Victoria an apportionable claim is a claim for economic loss or damage to property in an action for damages arising from a failure to take reasonable care.  This terminology is arguably broader in comparison.  Whereas the Queensland legislation confines an apportionable claim to a breach of duty of care (and limits the meaning of ‘duty’ even further), the statutory language in other jurisdictions could theoretically encompass any claim that arises from a mere failure to take reasonable care, irrespective of whether there is a breach of duty of care.

What is the effect of section 7(3) of the CLA?

Unfortunately, section 7(3) of the CLA has been the subject of a minimal amount of judicial consideration.  Nevertheless, the language of the section is in our view telling.  When read in conjunction with section 28(1), it strongly suggests that section 7(3) will apply only to the extent the proportionate liability regime applies.  As detailed above, the proportionate liability scheme in Queensland will apply in limited circumstances.  Specifically, where there is a claim for economic loss or damage arising from a breach of duty of care.

Does the ‘no contracting out’ provision prevent parties in Queensland from allocating risk and liability under contract?

Principals, contractors and subcontractors might question whether a clause might have the effect of contracting out (perhaps inadvertently) of the proportionate liability regime.  The contracting out prohibition imposed by section 7(3) is conspicuously limited.  It should only apply where:

  1. a claim brought in relation to the contract term is an apportionable claim under section 28(1) of the CLA; and
  2. the term has the effect (expressly or impliedly) of rendering the proportionate liability regime inapplicable.

As an example, a claim based on a breach of strictly contractual obligation (such as a warranty that the works will be fit for purpose) does not prima facie qualify as an apportionable claim.  Breach of such a contractual obligation does not necessarily require there to have been a breach of a duty of care.

The case of Hobbs Haulage P/L v Zupps Southside P/L & Anor [2013] QSC 319 lends support to our position.  The case involved a claim for breach of a fitness for purpose warranty implied by the Sale of Goods Act 1896 (Qld) and the Trade Practices Act 1974 (Cth).   The Queensland Supreme Court found that the fitness for purpose warranty was likely not subject to the proportionate liability regime.  This was because the duty to ensure something is fit for purpose is not concurrent and coextensive with a duty of care in tort and does not arise from a duty to take reasonable care or to exercise reasonable skill.

While Hobbs Haulage involved implied warranties, we consider the approach would be the same in respect of express contractual warranties.  A breach of an obligation that was strictly contractual (in the sense it is not also tortious in nature) would not fall within the ambit of the proportionate liability regime.  A contractual term must first bring the proportionate liability regime into play before the term will ever offend section 7(3).

The approach that suggests otherwise is unworkable.  It would lead to the paradoxical conclusion that an isolated contractual term that seeks to allocate or apportion liability amounts to contracting out and will offend the proportionate liability regime, even where the proportionate liability regime is not applicable.

The unfeasibility of this approach is demonstrated further when considering the position of arbitration in context of the proportionate liability regime. It is relatively well accepted that the proportionate liability regime does not apply in arbitrations.[1]  This is partly due to the language used in section 31(1) of the CLA (e.g. ‘proceeding’, ‘court’ and ‘judgment’) and partly due to the inability to join third parties to an arbitral proceeding.  If the proportionate liability regime does not apply in arbitrations and a contract in Queensland contains an arbitration clause, does this then amount to contracting out and therefore render the dispute resolution clause unenforceable?  Surely not.  Such a conclusion would be, in our view, absurd and would introduce even more uncertainty into the legal space.

Conclusion

Even though a contractual clause might allocate risk in a certain way or increase a party’s liability, it does not necessarily mean that the clause will be effectively contracting out of the proportionate liability regime.  In other words, there is no reason why section 7(3) will render a contractual term unenforceable if the claim brought in respect of the term is not an apportionable claim under the CLA.

Obviously inserting clauses such as fitness for purpose warranties comes with its own risks.  For example, insurance companies are usually unwilling to provide cover to parties who assume liability greater than they would otherwise have at common law.  These risks are well known in the industry and do not change the fact that some risk allocation clauses are essential tools for contracting in the construction industry.

The purpose of the proportionate liability regime is not to interfere with parties’ freedom to contract.  Rather, it aims to apportion liability between concurrent wrongdoers in relation to apportionable claims.  Parties should therefore be reassured that the contracting out prohibition in Queensland will not extend as far as to render important contract clauses as unenforceable, especially in circumstances where the duty is strictly contractual.

[1]           See for example, Parsons Brinckerhoff Australia Pty Ltd v Thiess Pty Ltd [2013] QSC 75; Aquagenics Pty Ltd v Break O’Day Council [2010] TASFC 3; Curtin University of Technology v Woods Bagot Pty Ltd [2012] WASC 449

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Andrew Kelly has been recognised in the 2017 Expert Guide to Construction and Real Estate in Australia, one of only three Queensland based construction lawyers to be recognised.

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Written by:

Andrew Kelly | Partner | +61 7 3338 7550 | akelly@tglaw.com.au

Chris Collins | Senior Associate | +61 7 3338 7553 | ccollins@tglaw.com.au

Isabelle Scanlan | Lawyer | +61 7 3338 7934 | iscanlan@tglaw.com.au