Hidden Contract Traps: How Indemnity Clauses Could Leave You Paying for Other’s Mistakes
By Milan Stancevic, Maya Sathiamoorthy
In this newsletter, we deal with a significant legal risk that contractors and subcontractors often overlook – if a contract has an indemnity clause, contractors may discover they can be held completely liable for mistakes that subcontractors were equally at fault for. NSW courts have ruled that if a contract includes an indemnity clause that removes proportionate liability protections, contractors cannot share this financial burden with other parties. This results in huge unexpected costs for contractors. This standard was set in the case Perpetual Trustee Co Ltd v CTC Group Pty Ltd (No 2) [2013] NSWCA 58 case (‘Perpetual’), which we will discuss alongside examples of contract clauses that may put contractors at risk under this rule.
Proportionate Liability Legislation
In New South Wales, the Civil Liability Act 2002 (CLA) governs proportionate liability, which applies to certain claims, including economic loss or property damage caused by a failure to exercise reasonable care and skill, and misleading or deceptive conduct under the Australian Consumer Law (ACL).
Proportionate liability ensures that if multiple parties contribute to a loss, each is only responsible for their share. This protects defendants from having to pay the full amount if others were also at fault. However, contracts in NSW can exclude proportionate liability, meaning one party could be held fully responsible even if others contributed to the loss. The Perpetual case confirmed this principle.
Legal Battle Over Liability: What courts had to say in Perpetual
CTC and Perpetual’s dispute centered on whether CTC could limit its liability under the Civil Liability Act 2002 (CLA). CTC argued that other parties, including a fraudster and Justices of the Peace, were also responsible for Perpetual’s financial loss. However, Perpetual claimed an indemnity clause in their contract overrode proportionate liability protections, making CTC fully liable. The key issue was whether this clause effectively excluded the CLA, even without explicitly mentioning it—ultimately leaving CTC to bear the entire financial burden of the fraudulent transactions.
Sample Clauses
Considering this case, we can better evaluate the ‘red flag’ provisions in design and construct contracts that effectively exclude the apportionment of liability, such as this.
44. Proportionate Liability
44.1 Exclusion of operation
It is agreed, to the extent permitted by law, that:
- The operation of the Proportionate Liability Legislation is excluded in relation to all rights, obligations and liabilities under this Contract; and
- Without limiting the generality of clause 44.1(a), the rights, obligations and liabilities of the parties (including those relating to proportionate liability) are as specified in this Contract and not otherwise.
Whether those rights, obligations or liabilities of the parties (including those relating to proportionate liability) are as specified in this Contract and not otherwise.
Clause 44.1 explicitly mentions that the Proportionate Liability Legislation (i.e. the Civil Liability Act) is excluded. Here, the Head Contractor would be liable for the full amount of damages suffered as a result of its error. It cannot apportion that liability to another concurrent wrongdoer even if their act or omission contributed to that damage.
44.2 Trade Contracts
The Construction Manager must include in any contract it enters into with others for the carrying out of any part of the Works, provisions that, to the extent permitted by law, effectively exclude the operation of the Proportionate Liability Legislation in relation to all rights, obligations or liabilities under those contracts whether those rights, obligations or liabilities are sought to be enforced as a breach of contract, in tort or otherwise.
Clause 44.2 obligates the Contractor to exclude the Proportionate Liability Legislation in all its Trade Contracts. Thus, if a subcontractor does a defective waterproofing job on an apartment complex, they would be liable for their fault and cannot try apportioning that liability on another concurrent wrongdoer.
Key Takeaways: Understanding Liability Protections and Risks
Proportionate liability legislation offers significant protection by reducing the amount of liability and damages each defendant is responsible for in economic loss claims, especially when multiple parties contribute to the loss.
Contractual caution is critical – any clauses that seek to exclude proportionate liability protections should be carefully reconsidered and, if possible, removed, as they may expose parties to full liability. An explicit reference to the Civil Liability Act is not required to contract out of proportionate liability. Even an indemnity clause that conflicts with the legislation can effectively exclude the apportionment of liability, placing full responsibility on one party.
It is essential for parties to carefully review their contracts to ensure they are not inadvertently removing important legal protections.
Contact Crisp Law for advice and information at:
Telephone: +61 2 8042 8701
Email: admin@crisplaw.com.au
