Business Law

Contractual risk: filling the gap

B2B Editor7 November 2013

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Australia exists as one of the most regulated economies in the world. As new technology and access to information sweeps through our lives, society’s expectations of what businesses should deliver is constantly rising. That expectation shift means increased “risk” for businesses, as our society becomes increasingly litigious.

In all skilled trades and professions this increasingly complex world demands that businesses must get specifically skilled teams to do specific jobs. Industry has long dealt with meeting specialist needs by “subcontracting”.

What many often overlook is the risk posed to them by “proportionate liability1” and by the further subcontracting of modern day responsibilities to multiple subcontractors down the line. Having multiple contributors to an outcome can leave a gap between the contractual commitment which a “head contractor” makes with its client and the capacity of the head contractor to recover compensation from its subcontractors.

Where multiple subcontractors have failed to take reasonable care or have breached the Australian Consumer Law causing economic loss or damage to the client2 then each “concurrent wrongdoer” who contributed to that loss will only be found liable for the proportion of the loss that they caused. Therefore, if the head contractor is going to be able to recover 100% of the loss inflicted on the client, then every party who contributed to the loss must be identified and pursued for their share3.

Head contractors must, therefore, assess their risk in the context of:

* Any indemnities for loss or damage they give to their clients;

* The indemnities they demand from their subcontractors; and

* The scope of coverage offered by their insurance.

The contractual promise to indemnify a client is typical, as is the scope of insurance coverage. Insurers typically cover liabilities for a “failure to act with reasonable care”, but generally exclude any liability that the insured has voluntarily assumed under contract (such as an indemnity) unless such liability would have arisen even in the absence of the contract.

Contractors who are not careful risk exposing themselves to their promise to make good 100% of the losses suffered by their client (if the contract terms are not fulfilled) but being left with an insurance payout which only covers the proportion of the loss they actually caused. If the head contractor had no part to play in causing the loss, then their insurance cover risks being zero.

Solution – get your contracts right or pay higher insurance premiums.

1Imposed in the ACT through the Civil Law (Wrongs) Act 2002 (ACT).

2An “apportionable claim” is subject to further qualifications and exceptions.

3 Hunt & Hunt Lawyers v Mitchell Morgan Nominees Pty Ltd [2013] HCA 10

Mark Love, Legal Director, Business Law 9th Floor, Canberra House, 40 Marcus Clarke Street, Canberra ACT 2601 E: [email protected] T: 02 6274 0810 |