Contracting Out of Proportionate Liability in Australia

If you run a small business or startup, you’ve probably had this feeling: you’re doing everything right, but one project still carries a “what if it goes wrong?” risk.

That risk can come from a mistake you made, a mistake someone else made (like a consultant, subcontractor or supplier), or a mix of both. When a loss happens and multiple parties may be responsible, the question becomes: who pays, and how much?

This is where proportionate liability comes in, and why many businesses ask about contracting out of proportionate liability. Done properly, it can shift significant legal and financial risk. Done poorly, it can be ineffective (or even create other commercial problems).

Below, we’ll walk you through what proportionate liability is, when you may be able to contract out, and how to approach drafting these clauses in a practical way that fits how small businesses actually operate.

What Is Proportionate Liability (And Why Does It Matter To Your Business)?

Proportionate liability is a legal concept that can apply when:

• someone suffers loss or damage;
• the loss is caused by more than one party; and
• the claim is the type of claim covered by proportionate liability laws (this varies across Australia and often focuses on certain negligence-style claims for economic loss/property damage; whether and how it applies to misleading or deceptive conduct depends on the jurisdiction and the specific legislation).

In simple terms, proportionate liability can mean each wrongdoer pays only their “share” of the loss, rather than one party being forced to pay the full amount.

From a small business perspective, this often comes up in professional services and project-based work, for example:

• a digital agency working alongside a separate SEO consultant and a web developer;
• a construction business using subcontractors and suppliers;
• a SaaS provider integrating third-party tools or relying on a hosting provider;
• a management consultant working with a client’s in-house team and other advisors.

Why Proportionate Liability Can Be A Double-Edged Sword

Proportionate liability is sometimes “good news” for a defendant, because you may not be stuck paying 100% if others contributed to the loss.

But it can be “bad news” for a claimant (including your business when you’re the one suffering the loss), because you might have to chase multiple parties to recover the full amount.

This is why contracts often try to control it up front - either by contracting out of proportionate liability, or by allocating risk in other ways (like indemnities, insurance requirements, caps on liability and clear statements of responsibility).

Quick Note: The Rules Differ Across Australia

Proportionate liability rules are not perfectly uniform across Australia. They differ depending on the State or Territory, the specific Act that applies, and the type of claim (for example, negligence-style claims for economic loss/property damage versus statutory claims like misleading or deceptive conduct).

That’s why the wording and enforceability of a “contracting out” clause can depend heavily on:

• the governing law clause in your contract (e.g. NSW law, Victoria law, Queensland law);
• the type of claim that might arise; and
• whether any statutory restrictions apply (including consumer protections and rules that can’t be excluded).

What Does “Contracting Out Of Proportionate Liability” Actually Mean?

When people talk about contracting out of proportionate liability, they usually mean a clause that aims to do one (or both) of the following:

• Preserve joint and several liability (so one party can be responsible for the full loss, even if others contributed); and/or
• Prevent a party from relying on proportionate liability defences (so they can’t say “I’m only 20% responsible, so I only pay 20%”).

In practice, the clause often reads like: “The parties agree that proportionate liability legislation does not apply,” or “Each party waives the benefit of proportionate liability.”

But in the real world, a clause like that is only the starting point. You also need to think about:

• what claims the clause is trying to cover;
• whether you can legally exclude the operation of proportionate liability for those claims (and in that jurisdiction);
• how the clause interacts with your limitation of liability and indemnity provisions; and
• whether the clause could be challenged as unfair (particularly for smaller customers or standard form agreements).

Why Businesses Try To Contract Out

Businesses typically push for contracting out because it can simplify disputes and reduce “multi-party litigation” risk.

For example, if you’re the customer paying for a project, you might prefer to sue one main contractor and leave them to pursue subcontractors.

If you’re the supplier, you might resist contracting out because it increases your potential exposure - especially if you’re the “main” provider but only one part of a broader project.

There’s no universally “right” position. The goal is to align the clause with your role in the project and your actual ability to control the work.

When Can You Contract Out Of Proportionate Liability In Australia?

Whether you can contract out depends on the jurisdiction and the type of claim. In some States/Territories and for some categories of “apportionable” claims, contracting out may be permitted (sometimes only if the clause is clear and specific). In other cases, contracting out may be restricted, uncertain, or effectively overridden by mandatory statutory rules.

It’s also important to remember that even where contracting out is permitted for a particular proportionate liability regime, it won’t necessarily protect you against every kind of claim a party might bring (including claims where liability can’t be excluded or limited by contract).

So instead of treating it as a one-size-fits-all clause, it’s better to treat it as a risk allocation decision that should be consistent with your overall contract framework.

Common Situations Where Contracting Out Comes Up

• Master services agreements (MSAs) and statements of work (SOWs): especially where a client engages multiple vendors.
• Construction and trades agreements: where multiple contractors contribute to one outcome.
• Professional services (consulting, accounting, IT): where advice may be based on information provided by others.
• Startup partnerships: where founders want clarity on risk allocation if something goes wrong (often addressed through governance and project documentation, and sometimes a Shareholders Agreement).

Be Careful With Standard Form Contracts

If you use standard form terms (common for startups and small businesses), you also need to think about whether a contracting-out clause could be considered unfair in certain circumstances.

Even if a clause is technically “allowed,” it may be challenged if it creates a significant imbalance, isn’t reasonably necessary to protect legitimate interests, and would cause detriment if relied on.

This is one reason it’s important that your contract is consistent end-to-end - for example, the way you try to exclude proportionate liability should match your overall limitation of liability approach and your commercial negotiation position.

How To Draft A Contracting Out Clause (Practical Steps That Actually Help)

A well-drafted “contracting out of proportionate liability” clause is rarely just one sentence. It usually sits within a broader risk section that includes:

• scope of services (what you are and are not responsible for);
• assumptions and dependencies (what you rely on the customer or third parties to do);
• limitation of liability (caps, exclusions, indirect loss);
• indemnities (who covers what kinds of claims);
• insurance requirements (if relevant); and
• dispute processes.

Step 1: Get Clear On Your Contract Role

Ask yourself: are you the “prime contractor” (the party the customer expects to own the outcome), or one of several contributing providers?

If you’re the prime contractor, your customer may insist you bear the risk and manage your subcontractors. In that case, contracting out of proportionate liability might be commercially acceptable, but you’ll want strong back-to-back protections in your subcontractor agreements.

If you’re one contributor among many, contracting out may expose you to risk you can’t control. You may instead push to keep proportionate liability in place (or narrow the contracting-out clause substantially).

Step 2: Define What Claims The Clause Applies To

A common drafting mistake is being too vague. A more robust approach is to specify whether the clause applies to:

• all claims “arising out of or in connection with” the agreement;
• only certain types of claims (e.g. specified negligence-style claims, or specified statutory causes of action where contracting out is permitted);
• claims by the other party only (not third party claims);
• claims relating to specific deliverables or milestones.

The broader the clause, the more negotiation pushback you can expect - and the higher the risk it won’t operate as intended in a dispute.

Step 3: Align It With Your Liability Cap (So You Don’t Create A “Unlimited Risk” Problem)

This is a big one for startups.

If you contract out of proportionate liability, you may become responsible for 100% of a loss even if your actual fault is minor. If your limitation of liability is unclear (or missing), that can become an “existential” risk event for a small business.

Your contract should clearly deal with:

• whether there is a cap on liability (e.g. fees paid in the last 12 months);
• what types of loss are excluded (e.g. indirect or consequential loss);
• carve-outs (for example, confidentiality breaches, IP infringement, fraud); and
• how liability is treated across multiple SOWs or projects.

If you’re also providing online services, your public-facing terms can matter too, including Website Terms and Conditions and other platform terms that shape your risk exposure.

Step 4: Use Back-To-Back Protections With Your Contractors And Suppliers

If you accept “full risk” to your customer, you should seriously consider whether your contracts with subcontractors:

• require them to meet the same standards you promised the customer;
• include indemnities for losses they cause;
• require insurance (where appropriate); and
• allow you to recover amounts you pay to the customer due to their failures.

This is where a properly drafted Subcontractor Agreement can make the difference between a manageable dispute and a major unrecoverable loss.

Step 5: Make Sure The Clause Works With Your Dispute Strategy

Contracting out can make disputes simpler for one party, but it can also raise the stakes. If you’re the party taking on more liability, you want clear dispute procedures (including notice requirements, escalation and timeframes).

For startups, clarity here is underrated: even if you “win” legally, the distraction and legal spend can be significant. A clean contract helps you resolve issues earlier and more commercially.

Common Risks And Mistakes When Contracting Out (And How To Avoid Them)

Contracting out of proportionate liability is not just about dropping in a clause and hoping for the best. Here are some common issues we see when businesses try to do this themselves.

1. The Clause Conflicts With Other Parts Of The Contract

If one clause says proportionate liability doesn’t apply, but another clause says liability is “limited to the extent permitted by law,” you may end up with ambiguity.

Ambiguity is not your friend in a dispute. It gives the other side room to argue, increases negotiation friction, and can make outcomes less predictable.

2. The Contract Doesn’t Clearly Define The Scope Of Work

Many disputes aren’t really about “law” - they’re about mismatched expectations.

If your scope is unclear, a customer can argue you were responsible for outcomes that were never realistically under your control, and contracting out may increase how much you’re exposed to if that dispute escalates.

This is why well-drafted terms and statements of work are so important (including clear acceptance criteria, exclusions, and customer responsibilities).

3. You Accidentally Create A One-Way Risk Transfer That Customers Won’t Accept

Customers (especially enterprise customers) can be very sensitive to one-sided provisions. If you’re the supplier and you try to contract out (making you fully liable), the customer may love it. But if you’re the customer and you insist on contracting out (making the supplier fully liable), a quality supplier may push back hard or price the risk into the deal.

The practical approach is to treat this as a negotiation lever:

• If the other side wants contracting out, you might trade it for a lower liability cap carve-out, stronger exclusions, or clearer assumptions.
• If you want contracting out, you might offer concessions elsewhere (like a clearer warranty, service credits, or stronger insurance commitments).

4. You Ignore Consumer Law And “Non-Excludable” Rights

Some rights and guarantees cannot be excluded in certain customer relationships. This is particularly relevant if you sell to individuals or small businesses in a way that triggers Australian Consumer Law (ACL) protections.

Even if your contract includes a contracting out clause, you still need to be careful about broader compliance with obligations like not engaging in misleading conduct and handling warranties appropriately. If your business sells goods or services with consumer-type protections, it’s worth being familiar with consumer guarantees and how they can affect your liability position.

5. You Don’t Consider Data And Privacy Risk (Which Can Drive Loss Amounts Up)

For many startups, the biggest loss events involve data - downtime, security incidents, or privacy complaints.

These incidents can involve multiple parties (you, your cloud provider, your IT consultant, your customer’s internal team). If you try to contract out of proportionate liability without carefully addressing data handling responsibilities, you may take on more risk than you think.

As a baseline, it helps to have clear privacy and security terms, including a Privacy Policy and (where relevant) appropriate data processing terms with customers and vendors.

Key Takeaways

• Proportionate liability can affect who pays what when multiple parties contribute to a loss, and it often matters in complex projects with suppliers, contractors or consultants.
• Contracting out of proportionate liability is a risk allocation tool that can increase or reduce exposure depending on whether you’re the customer or the supplier.
• Whether contracting out is effective can depend on the jurisdiction, the type of claim, and the contract drafting (including how it interacts with liability caps and indemnities) - and in some cases it may not be available or may be limited by law.
• A practical contracting out clause should align with your scope of work, limitation of liability, subcontractor contracts, and dispute process, so it operates as part of a coherent agreement.
• Common pitfalls include unclear scopes, inconsistent clauses, and ignoring non-excludable statutory rights or data/privacy-related risk, which can make a dispute more expensive than it needs to be.

This article is general information only and not legal advice. If you’d like help reviewing or drafting a contract with a proportionate liability clause (or negotiating a clause you’ve been sent), you can reach us at 1800 730 617 or team@sprintlaw.com.au for a free, no-obligations chat.