Protecting all parties in the construction sector
The liability of principals, contractors and subcontractors is an important issue for Australian businesses providing services or products to the built sector.
The use of subcontractors is common in many industries and it is particularly prevalent in the construction industry. In this sector, a design and construct contract is commonly used, and requires the head contractor to have a single line of responsibility to the principal/developer.
Often the developer or head contractor will have construction or contract works insurance and this is designed to cover many of the contractors working on the site. Despite this, subcontractors in most cases are required to hold their own public liability insurance.
The chain of liability
Principals, head contractors and subcontractors can owe duties of care to each other under contract, at law and to any third party who is injured or has their property damaged.
The extent of the liability depends on which party was responsible for safety issues on the site and whose conduct caused the loss or damage. It is also possible for one or more people to have direct liability for third party loss or damage, but it also depends on the circumstances that led to the damage or injury.
The ‘principal and agent’ relationship between principals, head contractors and subcontractors may also create a situation where one or more is liable for loss or damage caused by others. This means the principal is liable for the acts of the head contractor, and in turn, the head contractor is liable for the acts of the subcontractor.
If, on the other hand, the parties have engaged with one another as ‘independent contractors’, the principal may not have liability, but could have other (collateral) legal liability arising from the work performed or the products supplied by the contractor.
The exposure to liability for others is why:
Head contracts usually contain indemnity clauses requiring the head contractor to indemnify the principal for its liability for any death, injury or damage caused by the head contractor and any subcontractors; and
Sub-contracts usually have similar clauses requiring the subcontractor to indemnify the head contractor for its liability for death, injury or damage caused by the secondary subcontractors.
The chain of liability can easily be broken if the indemnity clauses in each contract are not properly drafted to give each principal maximum legal protection. This is why contracts should require each party to hold insurance to cover the indemnities they have provided.
From the principal to the workers
Most public liability policies only cover the insured’s legal liability for third party property damage or personal injury and are not designed to cover another person’s legal liability.
However, it can depend on the actual words used in the indemnity and insurance clauses in the contract; and whether a subcontractor has cover for the principal’s liability in their public liability policy.
It is important to note that not all liability cover policies are the same. Some provide expansive coverage, while others are very restricted and will only apply when the contractor is acting as an agent of the principal or when the liability arises from the work performed by the subcontractor.
Public and products liability insurance may cover subcontractors and sub-consultants working on a project by an extension or endorsement. But contract works policies are more likely to cover subcontractors and sub-consultants, although sometimes this is limited to the material damage part of the cover and not the public liability section.
A good contract works policy should protect most of the people working on a construction project. However, as a subcontractor working on a project where the principal holds a policy to protect the workers on the project, it is important to check whether this provides appropriate cover, including for worker to worker claims involving the employees on the project.
Rather than relying on the courts to interpret an indemnity clause, it is better to have maximum protection from the insurance by either:
Having a policy that covers liability assumed under contract (e.g. umbrella liability) or make arrangements to have the policy endorsed and extended to cover liabilities assumed under the particular contract.
Re-negotiating the indemnity clause so it is consistent with the legal liability. This will involve incorporating elements of proportionate liability and contributory negligence into the wording of the indemnity clause, or confining the indemnity to where the loss or damage is caused by the subcontractor’s negligence.
Subcontract agreements need to have clear requirements for performing the services including appropriate indemnity and insurance clauses. If subcontractors are covered by the head contractor’s policy, a reasonable system of control and supervision of subcontractors is required to comply with policy conditions.
Source: The Fold Legal Pty Ltd, Tipsheet 12 – Public liability subcontractors