In August last year, the Government signaled a shift in the liability settings for the construction sector – a move from joint and several liability to proportionate liability. Following a consultative process, it is understood that drafting is under way as part of a broader Building Amendment Bill to be introduced in mid-2026.
In our previous articles, we explored the difference between joint and several liability and a proportionate liability system, as well as the measures intended to protect home-owners from the risk of insolvent parties. In this third article of our series, we discuss some key issues to be considered when enacting and implementing the proposed legislation.
Effective Start Date
We understand the Government proposal currently contemplates a transition period of one year. However, it remains unclear whether the new regime will apply to proceedings commenced after that date, or by reference to some other event occurring after that date (e.g. issuing of building consent, entry into a construction contract, commencement of construction).
The former has the advantage of clarity and simplicity – it provides a single start-date applicable to all. The problem, however, is that the proposed changes to liability settings will affect parties’ assessment of risks, both in terms of pricing and risk allocation, which will be reflected in contractual provisions. If the new system applies to disputes arising from contracts already in place, it may effectively rewrite those contracts, or at least alter the allocation of risk that parties understood they had agreed to. There is also the possibility that certain contractual provisions commonly used under the current framework may no longer be permissible.
Having a start date applied to contracts entered into after a certain date would not suffer such problems. However, construction projects typically involve multiple contracts entered into at different times across a range of parties. This may lead to the undesirable result that some contracts on a project may be governed by the proportionate liability regime and some may not, adding to complexity of proceedings. Similar consequences may apply if the trigger event is building consent or commencement of construction – design contracts for instance will likely be entered into earlier than either of these events. Applying the regime project-wide would eliminate inconsistencies but fall back into the risk of effectively redrafting those contracts entered into prior to the triggering event.
There may be no perfect solution. The transition period will need to be used by parties to ensure their contracts for upcoming projects are adapted to the new liability settings.
What is in and what is out?
It is not currently proposed that the legislation will apply across the board. Even within the construction sector, proportionate liability is to be limited to those undertaking “building work” as defined in the Building Act. This may exclude certain parties, such as manufacturers (other than of modular components) and suppliers.
This creates the risk of a fragmented liability landscape, where some parties remain subject to joint and several liability while others fall under a proportionate regime. Those outside the new framework may face increased exposure, and in some cases may assume the “deep pocket” role of covering the risk of insolvent parties. This may, in turn, affect the availability and cost of insurance.
Ideally, the legislation will ensure so far as possible that all types of person / entity who may potentially contribute to construction of a defective building are brought into the umbrella of performing “building work” under the Act.
Arbitrations and Adjudication?
Another open question is whether proportionate liability will apply only to court proceedings, or whether it will extend to arbitrations and potentially adjudications under the Construction Contracts Act.
Arbitration presents particular challenges because it is contractual in nature and non-contracting parties can only be joined by consent, whereas proportionate liability legislation contemplates joinder of multiple contributing parties. For this reason, it was long considered in many Australian jurisdictions that proportionate liability would not apply in arbitrations.
However, a recent decision in the Federal Court in Australia has found to the contrary – Tesseract International Pty Ltd v Pascale Construction Pty Ltd [2024] HCA 24. In that case, a majority of the Court found that proportionate liability legislation formed part of the substantive law of South Australia which the parties had chosen to govern their contract.
The policy issue here is a trade-off between the desirability of having one rule for all in relation to liability versus the potential burdens of implementing that rule in an environment where compulsory joinder of all contributing parties may not be an option. In Tesseract, two of the majority judges considered that the ability to join all parties was not an integral feature of the proportionate liability legislation in question since this did not require all potentially contributing parties to be joined in a single proceeding. They also observed that parties were free to contract out of proportionate liability laws in their arbitration clause. It should be noted that power to contract out depends on the law of the jurisdiction in question and not all states in Australia permit this (see discussion below).
Because of the absence of compulsory joinder, a potential consequence of applying joint and several liability to arbitrations could be to decrease the desirability of arbitration as a means of dispute resolution – contrary to the Arbitration Act’s purpose of encouraging the use of arbitration – and to increase pressure on an already overloaded court system.
If contracting out of proportionate liability is permitted, this concern could be addressed by including a contracting-out provision in the arbitration agreement. If contracting out of proportionate liability is not permitted, another possible option would be for the parties to allow an opting out of their agreement to arbitrate if confronted with a situation under a proportionate liability regime where one or more potentially contributing parties could not be joined to the arbitration.
With respect to the CCA, the right to refer disputes to adjudication is conferred upon parties to a construction contract. Most CCA disputes are two-party disputes (e.g., between contractor and principal, contractor and subcontractor), relating to contractual rights and obligations, and do not involve claims for damages arising from breach of a duty of care that proportionate liability legislation may require to be apportioned.
In some cases, however, for example, where a principal raises claims of defective work against a contractor and makes deductions accordingly, the responsibility of others (e.g., sub-contractor, design consultant) may be relevant. Whether this implicates proportionate liability or is simply a contractual matter, where, say, the contractor is contractually responsible to the principal for its subcontractor’s work, and the principal is contractually responsible to the contractor for the work of its design consultants, and then both parties have their own separate down-stream remedies, will be a question to be decided.
From a practical perspective, since (apart from a property owner) the CCA does not contemplate joinder of non-contracting parties, the above situation could be dealt with by separate adjudications and consolidation if all parties agreed. However, if parties do not agree to consolidate, separate adjudications are the only CCA mechanism.
Parties cannot contract out of the CCA in favour of another forum. However, CCA adjudications do not prevent parties from following their contractual dispute resolution processes and commencing arbitration / litigation / expert determination as per that process. If a party chooses to do this, a CCA adjudication effectively provides an interim result, pending outcome of the final dispute resolution process. Overlaying proportionate liability in this setting may therefore ultimately devolve the issue of proportionate contribution to the primary contractual dispute resolution mechanism.
Application to Contractual Claims as well as Tort?
A third question is whether proportionate liability applies to claims in contract as well as to claims in tort. At one end of the scale, there are situations where there is a duty of care in both contract and tort – under New Zealand law, these typically co-exist in tandem. At the other end of the scale, there are claims for breaches of indemnities or warranties, which are contractual in nature, not founded on negligence, and which can carry strict liability.
Again, seeking guidance from Australia, definitions of “apportionable claim” typically refer to a claim for economic loss or damage to property in an action for damages (whether in contract, tort, or otherwise) arising from a failure to take reasonable care (see, e.g., Civil Liability Act 2002 (WA) s 5AI; Civil Liability Act 2002 (NSW) s 34(1)(a); Wrongs Act 1958 (Vic) ss 24AE, 24AF(1)(a)). Such definitions sit happily with contractual claims for breach of a duty of care but might not implicate indemnities based on strict liability.
That raises the question of whether plaintiffs can effectively circumvent the regime by framing their claim as one for breach of contractual warranty or indemnity, thereby enabling full recovery against a single defendant, regardless of whether underlying facts support a claim for breach reasonable care that might implicate proportionate responsibility.
Australian authority is divided on this issue. In Tanah Merah Vic Pty Ltd v Owners Corp No 1 of PS613436 [2021] VSCA 72 [119]-[135] the Victorian Court of Appeal looked to the manner in which the plaintiff had plead its claim – in that case, breach of warranty claims did not require a failure to take care and so were not apportionable regardless of whether or not the circumstances upon which the claimant relied arose out of such a failure. By contrast, in Gerrard Toltz Pty Ltd v City Garden Australia Pty Ltd (in liq) (No 2) [2024] NSWCA 232 [171]-[183], the New South Wales Court of Appeal (obiter) emphasised the relevance of the underlying facts, casting doubt on the proposition that a claimant can avoid the proportionate liability regime solely through the form of its pleadings.
For New Zealand’s purposes, we should consider the extent to which a broad application of proportionate liability to contractual claims could effectively re-write parts of the law of contract within the construction sector and have wide-ranging implications for parties entering into construction contracts. This also impacts contracting out, discussed below.
Can you contract out?
Whether parties should be permitted to contract out of proportionate liability is another key issue. Allowing this would preserve freedom of contract and provide flexibility, particularly in protecting arbitration agreements and agreed risk allocations. On the other hand, it could be questioned whether allowing contracting out is consistent with the principles underlying the move to proportionate liability.
It should be noted that contracting out will be of no effect in respect of claims by or against third parties to the contract. In your typical defective building case, for example, even if the owner / developer and the builder contracted out as between themselves, there would be various parties with respect to whom proportionate liability still applied as a matter of substantive law, including Building Consent Authorities (who typically do not contract with anyone) and, likely, consultants (whose PI insurance could well preclude them from contracting out of proportionate liability). While this would add some layers of complexity to apportioning quantum in a multi-party case, it is unlikely that the option of contracting out would apply to substantially erode a proportionate liability approach across the board.
Looking to Australian law provides inconclusive guidance insofar as different states have adopted different approaches to contracting out. Western Australia expressly permits contracting out of its proportionate liability statutory provisions (Civil Liability Act 2002 (WA) ss 4A, 5AJ(2)(b)). Queensland adopts the reverse approach and expressly excludes the proportionate liability sections of its Civil Liability Act from the power of parties to make express contractual provisions in relation to matters to which the legislation applies (Civil Liability Act 2003 (Qld) s 7(3)). Other states have left the position to be developed through case law or have not addressed it directly.
There is also the question of what would amount to a contracting out. In New South Wales, Tasmania and Western Australia, courts have taken the view that contracting out need not be by way of express statement and may arise where contractual rights and obligations are inconsistent with the statutory regime (see Perpetual Trustee Company Ltd v CTC Pty Ltd (No 2) [2013] NSWCA 58 at [11]-[14] holding that an indemnity provision amounted to a contracting out). Similarly, in Aquagenics Pty Ltd v Break O’Day Council [2010] TASFC 3 [67]-[73], the court held that a clause providing the head contractor would be liable to the principal for acts and omissions of subcontractors was a contracting out of proportionate liability in respect of such acts and omissions.
In the New Zealand context one issue that may arise concerns liability caps. In Tauranga City Council v Harrison Grierson Holdings Limited [2024] NZHC 714 the court held that a liability cap clause is not a contracting out of Building Act liability but rather an allocation between the parties of who shall bear the costs attendant upon a breach. It is unclear whether and how this this reasoning would apply in the proportionate liability context.
For example, it could be argued that a liability cap was a partial contracting out of proportionate liability that allowed the regime to apply up to the cap, but contracted out beyond that. Alternatively, there may be no contracting out at all on this scenario – the proportionate liability of the defendant relying on the cap can still be determined to be in excess of the cap; the parties have simply agreed that the other contracting party will bear any above-cap losses. So, the contracting plaintiff bears any difference between the cap and a contracting defendant’s greater proportionate liability. This should not, of course, affect proportionate liability of other defendants or third parties.
Absent defendants and who is responsible for joinder?
Jurisdictions in Australia are split on the issue of who is responsible for joinder. In many states, the plaintiffs are required to join any necessary defendants to enable them to recover 100% of their loss. However, provision is normally made requiring defendants to identify to the plaintiffs any person they have reasonable grounds to believe may be a concurrent wrongdoer and explain the grounds for their belief. A defendant who fails to do this may be liable for costs the plaintiff has to incur because it was not aware of the existence or identify of such wrongdoer (see, e.g., Civil Liability Act 2002 (NSW) s 35A; Civil Liability Act 2003 (Qld) s 32(2),(3) and (5)).
In Victoria, when apportioning liability between defendants, the court must disregard the comparative responsibility of anyone who is not a party to the proceeding unless they are dead (or if a corporation, wound up) (Wrongs Act 1958 (Vic) s 24AI (3)). This effectively puts the onus on defendants to ensure that all other potentially liable persons are joined so as to minimise their own likely proportionate share. This approach can be contrasted with the NSW legislation which permits regard to be given to the comparative responsibility of non-party concurrent wrongdoers (Civil Liability Act 2002 (NSW) s35(3)(b)).
In Australia, subsequent proceedings can generally be brought by plaintiffs against concurrent wrongdoers not part of the original proceeding so long as the plaintiffs do not recover more than their total loss. However, subsequent courts are not necessarily bound by earlier decisions.
Concluding comments
As can be seen, there are many complex issues to be addressed in switching to a proportionate liability setting. New Zealand legislation will have the benefit of learnings from across the ditch, but because these laws operate at state level in Australia, guidance is frequently mixed.
In the last of these discussions on proportionate liability, we will be looking at the impacts of proportionate liability on rights of contribution and indemnity under the Law Reform Act 1936. We will also take a look at the Australian case of Pafburn Pty Limited v The Owners – Strata Plan No 84674 [2024] HCA 49 and the interplay of proportionate liability with duties of head contractors and developers.
If you have any questions about the proposed proportionate liability legislation, please get in touch with the authors or your usual contact at Hesketh Henry.
Disclaimer: The information contained in this article is current at the date of publishing and is of a general nature. It should be used as a guide only and not as a substitute for obtaining legal advice.
