Proportionate Liability Sounds Fair. But Who Pays When Someone Can’t?

Recently, I have received quite a few enquiries about the proposed move towards proportionate liability in New Zealand's building sector. Most of the questions have understandably focused on what the change actually means, how liability might be divided between different parties, and whether it will create a fairer outcome for contractors, consultants and councils.

The concept itself sounds relatively straightforward. If one party is responsible for 20% of a loss, it pays 20%. If another party is responsible for 50%, it pays 50%. On the surface, there is an obvious fairness argument: why should one party carry the financial consequences of another party's mistake simply because it happens to be the one still standing?

I understand the logic. But construction projects rarely operate as neatly as percentages on a piece of paper.

A $1 million example

Imagine a significant building defect results in a $1 million loss. After responsibility is assessed, a subcontractor is found to have contributed 30% to that loss. But by the time the defect becomes apparent several years later, that subcontractor has gone into liquidation, its insurance is inadequate, or the company simply no longer exists.

The 30% does not disappear with the company.

Someone still carries the economic consequence. Whether that's a solvent party further up the chain, as happens today, or the client, as would happen under the proposed regime, depends entirely on which law applies by the time the dispute lands.

This is why I think the conversation around proportionate liability needs to go much further than simply asking whether the proposed regime is fairer. It should make us reconsider how we procure construction projects in the first place.

Risk does not disappear. It moves.

One thing I have learned through years of contract and dispute work is that risk rarely disappears simply because we draft a clause saying somebody else is responsible for it. More often, the risk moves. It's a point the legal commentary on this reform keeps landing on too: moving to proportionate liability doesn't eliminate risk, it just hands it to someone else in the chain.

The same principle applies throughout the construction chain. Developers seek certainty from contractors. Contractors seek protection from subcontractors. Consultants limit their exposure through contractual terms and insurance. Each participant understandably wants to protect its own position.

The difficulty arises when risk is transferred to a party that does not understand it, has not priced it, cannot effectively manage it, or does not have the financial capacity to carry it.

Under a proportionate liability model, this becomes particularly important, because the financial strength, technical capability, insurance position and long-term viability of every participant become much more than administrative prequalification questions. They form part of the project's overall risk profile. This is where I believe the proposed change could have implications far beyond litigation. It should change the way we think about procurement.

The cheapest tender may not be the lowest-risk tender

For years, construction procurement has placed enormous emphasis on price. We tender packages, compare quotations, negotiate percentages and report savings. If one subcontractor is $50,000 cheaper than another, that saving is immediately visible and easy to explain.

What is much harder to quantify is the potential cost of selecting a contractor who may not have the capability or financial resilience to stand behind its work several years later.

I have always believed procurement should be about much more than finding the lowest number. When assessing a contractor or subcontractor, the question should not simply be "can they deliver this scope for this price?" We should also be asking: are they the right party to carry this particular risk?

A contractor may submit the cheapest tender but have limited financial resilience, insufficient insurance, weak quality systems, limited experience with the particular scope, or inadequate resources to manage the obligations being transferred to it. Another contractor may cost slightly more but have stronger systems, appropriate insurance, experienced people, proven technical capability and the financial capacity to stand behind its work.

A traditional tender comparison may make the first contractor look cheaper. A proper risk-based procurement assessment may reach a very different conclusion. If proportionate liability becomes part of New Zealand's building liability framework, the identity and quality of the parties we bring into a project may matter even more. Procurement is not finished when a subcontract is awarded. We are selecting businesses that may need to stand behind their work for years after construction has finished.

We need a smarter definition of "best value"

Perhaps this is the most important procurement lesson to come from the current discussion.

Our industry has talked about "best value" procurement for years, yet price still carries enormous weight in many tender decisions. Maybe we need to become more sophisticated about what value actually means.

A stronger procurement assessment should consider price alongside technical capability, relevant experience, financial resilience, insurance coverage, quality systems, design capability, previous performance and the contractor's ability to understand and manage the contractual obligations being placed upon them.

We may also need to think more carefully about how packages themselves are structured. Fragmenting work into numerous smaller packages may produce competitive pricing, but it also creates more interfaces, and more interfaces create more opportunities for responsibility to become unclear. Similarly, transferring every possible risk downstream may produce a contract that appears very protective of one party, but it does not necessarily produce a safer project.

The smartest procurement strategy is not the one that transfers the most risk. It is the one that places each risk with the party genuinely best able to understand, manage and carry it.

You cannot contract your way out of poor procurement

There is a tendency in construction to use contracts to compensate for poor procurement decisions. We select a contractor primarily because of price and then attempt to protect ourselves through broader indemnities, stronger warranties, additional security, onerous special conditions and extensive risk-transfer clauses.

But a contract cannot turn an unsuitable contractor into a suitable one. And an indemnity clause cannot create money inside an insolvent company.

That said, a well-drafted indemnity is still doing real work, just not the work most people think. Courts elsewhere have already treated carefully worded indemnity and liability provisions as capable of shifting risk allocation in ways that sit outside, or even override, the statutory default. Contract quality decides how risk is allocated between the parties who are still standing. Procurement quality decides how many of your parties are still standing in the first place. Neither one substitutes for the other. You need both, and they need to be working together from the outset, not bolted on after a package is awarded.

Contractual risk management should start before the contract is drafted. Procurement strategy, contractor selection, scope allocation and contractual conditions should work together rather than being treated as separate exercises. If a package carries significant design responsibility, select a party with the technical capability and insurance to carry that responsibility. If long-term performance is critical, consider whether the business is financially and operationally capable of standing behind its work. If several trades meet at a technically complex interface, establish responsibility before construction begins rather than waiting for everyone to argue about it after something fails.

Then use the contract to document that allocation clearly.

Clear responsibility becomes even more important

There is another issue that I believe deserves considerably more attention: scope clarity.

If liability is ultimately going to be allocated according to each party's contribution to a loss, being able to establish who was responsible for what becomes critical. Anyone who has worked through a construction dispute will know that this can be surprisingly difficult. Who designed the detail? Who coordinated the interface between two systems? Who reviewed it? Who approved the substitution? Was the subcontractor responsible only for installation, or had it also accepted design responsibility? Who was required to identify that two systems were incompatible?

On a live construction project, the answers can become surprisingly messy. The contract may say one thing, the subcontract scope may say another, the drawings may leave the interface unclear, and an email or site instruction issued six months later may have shifted responsibility again.

These ambiguities can be manageable while everyone is working collaboratively. Once a defect occurs and parties begin trying to establish percentages of responsibility, they become extremely important. This is echoed in how the reform itself is being framed: councils are relieved of underwriting other people's insolvency, while builders, designers, and engineers gain a clearer line around where their own responsibility starts and stops. That clarity only reaches you, though, if your own contract already states, in specific terms, what your scope was.

There's an added layer of urgency here that's specific to this transition. Contract commentary on the Bill has flagged that applying the new liability settings to contracts already signed risks quietly rewriting the risk allocation those parties originally agreed to, since pricing and risk decisions were made under the old rules. The recommendation from that same analysis is direct: use the transition period to get contracts for upcoming work aligned to the incoming settings, because there may be no clean way to fix this after the fact.

In other words, a contract signed today, with the wrong assumptions baked in, could end up sitting under a completely different liability regime by the time anyone needs to rely on it.

We need better contracts, but better does not necessarily mean longer. I regularly review contracts containing pages and pages of special conditions designed to transfer as much risk as possible. Adding another 30 pages of amendments does not automatically create better risk management.

However, clarity does.

A good contract should make responsibilities easier to identify. Design obligations should be clearly allocated. Scope interfaces should be defined. Insurance requirements should reflect the actual exposure. Approval processes should be workable, and risks should sit with the parties genuinely capable of understanding and managing them. Transferring a risk to someone who cannot manage it may protect your contractual position on paper, but it does not necessarily protect the project.

Perhaps this is the bigger opportunity

The proposed move towards proportionate liability is understandably generating discussion about who should pay when building work goes wrong. That discussion is important, and the detail of the final legislative framework will matter, particularly during the transition window once the Bill passes, while existing contracts and new ones will need to be brought into line with the incoming settings.

But I think there is a bigger opportunity here.

Instead of only asking who pays after a failure, perhaps we should also be asking what we can do differently before the project starts. Better contracts matter. Clearer scopes and responsibilities matter. Financial and technical due diligence matter. Appropriate insurance matters. Smarter procurement matters. And selecting the right contractor matters.

Because proportionate liability may ultimately determine how the cost of failure is divided.

Good procurement determines how likely that failure is to happen in the first place. And perhaps that is where the industry's attention should really be.

If the current discussion around proportionate liability has prompted you to reconsider how risk is allocated within your contracts or procurement strategy, I offer contract review and commercial risk assessment services for contractors, subcontractors and project participants.

Have a great weekend.

Emmolina

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Emmolina May is a Registered Quantity Surveyor, contract specialist, educator and dispute resolution practitioner based in New Zealand. She helps contractors, subcontractors and developers understand contractual risks, negotiate clearer terms, improve procurement and commercial strategies, and resolve disputes when they arise. Her focus is on helping construction businesses understand and allocate risk before it becomes an expensive problem.