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Contractual Risks Allocation and Proportionate liability

by Dave Collins on December 21, 2016

Risks allocation between contracting parties is an integral part of contractual negotiations. In order to clinch a deal, some insureds are often under commercial pressure to contract out of the effects of proportionate liability legislation. For instance, contractors to a major project may agree that each will be jointly and severally liable to the principal which means that the principal could recover 100 percent of their loss from any one of the defendant contractors, even if each of those contractors caused only a part of the principal’s total loss. Furthermore, the contractors themselves may also include appropriate indemnities in their agreement so as to share liabilities as between themselves in proportions that may differ from the proportions that may be determined by a court.

Some proportionate liability legislation expressly permits the “contracting out” of the application of the legislation. Most proportionate liability laws are silent on the issue whilst some (eg. in Queensland) specifically prohibit the practice of “contracting out”.

For insurance purposes, it is especially significant that an agreement which apportions liability between parties differently to any applicable proportionate liability laws may operate as if the parties had “contracted out” of proportionate liability laws. If, for example, a party agrees to be responsible for the acts and omissions of its subcontractors – a term that is typically contained in most Design & Construct contracts – the party may have impliedly agreed to “contract out’ of the proportionate liability regime. By doing so, that party may be voluntarily assuming a greater liability than its liability at law, without realising it. This has important insurance ramifications as discussed below.

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