Australia: The ins and outs of proportionate liability – Perpetual Trustee Company Ltd v CTC Group Pty Ltd

The policy behind the statutory defence of proportionate liability is at least in part to alleviate the prospect of a defendant unfairly bearing the entirety of a plaintiff's commercial loss, in circumstances where it is only responsible for a small proportion of that loss. The corollary is, perhaps, that the defence should not be cast aside lightly.

In Queensland, it is not possible for parties to agree to forego their statutory recourse to a proportionate liability defence. In respect of the Victoria, South Australia, Australian Capital Territory, Northern Territory and Commonwealth provisions, the legislation is silent. In New South Wales, Western Australia and Tasmania, parties are entitled to agree to contract out of the defence, in certain circumstances. The recently released Model Provisions favour a prohibition on contracting out of proportionate liability, except in limited circumstances¹⁴.

In Perpetual Trustee Company Ltd v CTC Group Pty Ltd (No 2)¹⁵, the New South Wales Court of Appeal was asked to determine whether the plaintiff, Perpetual, and the defendant, CTC, had expressly contracted out of the proportionate liability provisions. The case involved a fraud perpetrated by a borrower against Perpetual. One of the bases of Perpetual's claim for damages was that CTC had provided Perpetual with a contractual indemnity. In a previous decision, the Court found that CTC had failed to adequately identify the borrower, which was a breach of a warranty it had given to Perpetual. In the relevant contract, CTC had agreed to indemnify Perpetual in connection with any breach of warranty¹⁶.

The indemnity was provided prior to the introduction of the New South Wales proportionate liability scheme, and therefore did not contain any reference to the proportionate liability provisions. It follows that the indemnity did not explicitly exclude the operation of the proportionate liability defence. The indemnity simply allocated risk between the parties in a particular way.

In Perpetual, the New South Wales Court of Appeal decided that the parties had expressly contracted out of the proportionate liability defence because the parties had agreed to a contractual allocation of risk that was not consistent with the operation of the proportionate liability provisions. In particular, the Court held that "...the parties to the [relevant contract] have made express provision with respect to a matter covered by [the proportionate liability legislation]."

In Perpetual, the Court referred to (but did not rely upon) the decision of the Tasmanian Full Court in Aquagenics Pty Ltd v Break O'Day Council¹⁷, where the Tasmanian Full Court held that relevant contracting out provision was "to ensure the primacy of express provisions of a contract". The Court also cited a paper written by Professor McDonald¹⁸, which refers to "the significant restrictions that the [proportionate liability] legislation might impose on contractual allocation of risk if given too broad an interpretation".

The decision in Perpetual highlights the tension between the scope that should be afforded to the proportionate liability defence, and primacy of contract. However, there are more important issues at play that are fundamental to the operation of the proportionate liability defence.

The reasoning in Perpetual shows that the Court turned to one of the plaintiff's pleaded claims, being a claim regarding contractual allocation of risk, and then immediately considered whether the defendant was excluded from recourse to the proportionate liability defence due to that contractual allocation of risk. The Court found that the defendant was so excluded.

An alternative approach to that taken in Perpetual is to consider whether the proportionate liability defence applies19 before a determination is made as to whether the defence is excluded by the express contractual arrangements between the parties. This is an important distinction because, under this approach, contractual allocation of risk is relegated to only one of the numerous considerations that a court takes into account when determining whether the defence applies²⁰.

The contract allocation of risk becomes relevant, rather than determinative. Only once the preconditions for the defence have been established is it necessary to determine whether the parties have agreed to contract out of the defence. Such an approach arguably highlights the need for parties to agree to an express (synonymously, an explicit or deliberate) provision to exclude the operation of the proportionate liability defence. It is arguably consistent with both the wording and the policy behind the proportionate liability legislation. It also prevents a plaintiff from evading the operation of the defence through selective pleading.

Secondly, while Perpetual may give weight to primacy of contract, it complicates another relevant contractual allocation of risk – the policy of insurance between the defendant and its insurer. Most insurance policies purchased by small to medium businesses exclude cover for liabilities assumed under contract, except to the extent that those liabilities would otherwise attach at common law or statute. If a defendant unintentionally contracts out of the proportionate liability defence, the defendant may be left holding a large uninsured risk²¹, being the difference between the amount the insurer would be required to pay if the defendant had recourse to the defence, and the amount the defendant has to pay without recourse to the defence.

Following the clarification of the scope of the proportionate liability defence provided by the High Court in Hunt & Hunt²², it will be interesting to see whether Perpetual will be applied, or whether it will be confined to its particular facts.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.