The effect of proportionate liability on risk allocation



Before proportionate liability was introduced, it was possible in some circumstances for a principal to recover 100% of its loss from either the contractor or the designer. In that event, the contractor or the designer (as the case may be) had a right to claim contribution from the other.

Under proportionate liability however, the principal is only entitled to recover from each of the contractor and the designer the portion of the loss for which it is responsible. The principal bears the risk of the contractor or the designer not being able to meet its liability.


Practical consequences of proportionate liability



Principals in construction projects have traditionally relied upon the contractor to provide a single point of responsibility.

In some states, the major threat posed by proportionate liability was seen as its potential to break down the single-point responsibility of a contractor for the work of sub-consultants or subcontractors and place the risk of recovery from a sub-consultant or subcontractor with the principal.

In fact, in some states this risk may be exaggerated.

CASE STUDY



Commonwealth Bank v Witherow

(2006) VSCA 45 [Victoria]



Facts


  • The bank claimed against Mr Witherow a sum of $150,000 on a guarantee of his company's overdraft facility.
  • Mr Witherow sought to engage the proportionate liability regime and to join his accountant to the legal proceedings, who he argued had failed to give proper advice about the company's financial position before he signed the guarantee.
  • The court allowed Mr Witherow to join his accountant Dennington.
  • The bank appealed to the Court of Appeal.
  • The legal relationships of the parties is depicted diagrammatically below:


Result


  • The Court of Appeal upheld the bank's appeal and said that the claim did not engage the proportionate liability regime as the bank's claim was not a 'claim in an action for damages'.
  • Further, the duty of care upon which Mr Witherow relied was not a duty of care owed by the accountant to the Bank.
  • The court said that the proportionate liability regime was not intended to apply in circumstances where the bank had no legal relationship with the accountant, as demonstrated by the diagram above.

The decision in Commonwealth Bank v Witherow reduces the threat of proportionate liability to single point responsibility, at least in Victoria. This is because the legal relationships of the principal, head contractor and subcontractor is similar to that considered in that case. This relationship is demonstrated diagrammatically below:




Because a subcontractor owes no duty of care to the principal, the subcontractor cannot be a concurrent wrongdoer in relation to a claim made by the principal against the head contractor. The reasoning in this case may also apply to the proportionate liability regimes in other states.

back to top | next page