What Proportionate Liability Actually Means When a Party Can't Pay
Introduction
Victoria has operated under a system of proportionate liability in building claims for close to two decades. Under Part IVAA of the Wrongs Act, a defendant found partly responsible for a loss is only liable for its own share, rather than the whole amount. New Zealand is currently debating whether to introduce something similar in its building sector, and that debate is a useful prompt to reconsider how the system actually operates here.
The logic behind proportionate liability is if a subcontractor is found to have caused 30 per cent of a defect, it pays 30 per cent. The difficulty arises once that subcontractor no longer exists to pay anything at all.
Where the shortfall ends up
For example, imagine a building defect that causes $1 million in loss, where a waterproofing subcontractor is found 30 per cent responsible. By the time the defect surfaces, often years after practical completion, that subcontractor may have been deregistered or wound up, with insurance that has lapsed or was never adequate to begin with. The 30 per cent does not evaporate along with the company. Instead, the owner is left recovering only from whichever party remains solvent, and frequently recovers less than the full loss as a result.
This is precisely why proportionate liability disputes in Victoria so often turn into arguments about who else can be drawn into the litigation. Owners issue third-party notices seeking to join additional defendants, since spreading a potential shortfall across a wider group improves the prospects of actual recovery. It is a live and recurring tactical question in nearly every building defect matter of any complexity.
Getting ahead of it
The lesson emerging from the New Zealand debate applies with equal force here, and it has less to do with litigation strategy than with how contracts are put together in the first place.
Scope clarity becomes critical once liability must be apportioned. Where a subcontract fails to clearly identify who was responsible for a particular design detail or interface, establishing percentages later becomes a dispute in itself, layered on top of the original claim.
Financial capacity and insurance coverage also warrant closer scrutiny at the procurement stage than they typically receive. A subcontractor’s price is straightforward to compare. Its likely continued existence, and continued insurance, five years down the track is harder to assess, yet arguably matters more once something goes wrong.
The risk that Part IVAA creates for owners is still there regardless. But parties who structure their contracts carefully and select subcontractors with genuine diligence put themselves in a considerably stronger position when a defect claim eventually surfaces. Those who don’t are left unable to recover from insolvent apportioned parties.
To learn more about any of the matters discussed here, or if you require legal assistance, please contact Chris Moshidis, Director and Principal Lawyer on +61 3 9521 7956 or chris@urbanlawyers.com.au.