Proportionate liability applies in arbitrations, High Court confirms

Tesseract International Pty Ltd v Pascale Construction Pty Ltd [2024] HCA 24

On 7 August 2024 the High Court of Australia allowed an appeal from the decision of the Court of Appeal of South Australia in a long-running dispute between Tesseract International Pty Ltd (Tesseract) and Pascale Construction Pty Ltd (Pascale) on the application of the South Australian proportionate liability regime to disputes which are the subject of arbitration.

The High Court held by a 5 to 2 majority that Tesseract (the respondent in the arbitration) is entitled to rely upon proportionate liability laws¹ to reduce its potential liability. Whilst the decision concerns South Australian legislation, the reasons for the decision make it clear that it will impact the conduct of arbitrations in all jurisdictions.

In coming to this decision, the High Court has overturned decisions of other courts in the country, including the South Australian Court of Appeal, in this matter. The impact of this decision is significant for Pascale. Tesseract can now seek to reduce any liability it may be found to have to Pascale on account of the conduct of a third-party concurrent wrongdoer, with that third party not being a party to the contract between Pascale and Tesseract or the arbitration.

Background

Tesseract and Pascale had entered into a contract for the provision of engineering consultancy work by Tesseract with respect to Pascale's design of a warehouse in South Australia. The dispute resolution clause in the contract provided for conciliation and then arbitration in South Australia.

A dispute regarding Tesseract's work was referred for arbitration. Pascale claimed damages for breach of contract and negligence and pursuant to section 236 of the Australian Consumer Law for misleading or deceptive conduct in breach of section 18. Tesseract denied liability, or alternatively alleged that any liability should be reduced on account of the conduct of a third-party concurrent wrongdoer. The third party was not a party to the contract between Tesseract and Pascale. Pascale denied that the proportionate liability laws applied in the arbitration.

The position adopted by Pascale in the arbitration was, in our experience, consistent with the approach generally adopted in arbitrations; that is, that proportionate liability laws cannot be relied upon by parties to an arbitration because an arbitrator does not have the jurisdiction to join third parties to an arbitration without their consent. Therefore, an arbitrator cannot apportion liability among concurrent wrongdoers, for the simple reason that not all wrongdoers are parties to the arbitration.

Decision of the High Court

In reversing this long-held approach, a majority of the High Court found that:

• the mere fact that there is an arbitration agreement between two parties does not demonstrate that the parties contracted out of the application of the proportionate liability laws to the resolution of their dispute;
• the inability to join all alleged concurrent wrongdoers to an arbitration does not mean that the proportionate liability laws are inapplicable;
• it was accepted that the law applicable to the resolution of the substance of the dispute between Pascale and Tesseract is the law of South Australia and the proportionate liability laws form part of that law; and
• the proportionate liability laws can be modified to apply to an arbitration.

The majority of the High Court emphasised that the parties' choice of law in arbitration is the priority.

Impact of this decision

This decision has the potential to adversely impact applicants in an arbitration, particularly in construction industry disputes. A respondent can now seek to reduce its liability in an arbitration where there is a third-party concurrent wrongdoer, even when that third party is not a party to the contract that is the subject of the arbitration. As a result, applicants in the arbitration could be left without the benefit of full recourse against the respondent, despite the existence of an arbitration agreement which, on its face, was intended to completely resolve the dispute between the contracting parties.

Conversely, this decision will likely aid the position of respondents and their insurers, who can now seek to reduce liability in an arbitration on account of the conduct of a concurrent wrongdoer as opposed to having to commence separate recovery proceedings against a third-party concurrent wrongdoer. The time and cost savings for a respondent, and its insurer, could be significant.

We await to see how this decision will impact the arbitration landscape, including how applicants will seek to manage the impacts of this decision through contractual drafting to maintain the effectiveness of arbitration as a mechanism for dispute resolution - if, indeed, that is now possible without future legislative intervention.

Applicants may also need to consider the strategic benefits of enforcing arbitration clauses in contracts, particularly in large construction disputes involving numerous parties, or whether an agreement to proceed straight to litigation is more appropriate in the circumstances.

Parties wishing to fully resolve their disputes through arbitration can arguably still do so by including in the arbitration agreement an express exclusion of any proportionate liability laws of the applicable jurisdiction. However, not all Australian states and territories permit parties to do so. In Queensland, for example, a party cannot contract out of the proportionate liability regime. Careful consideration will need to be given as there is not a consistent or uniform approach to this issue.

If you would like to discuss how this decision may impact the management of your construction dispute, please get in touch with our team.

¹ Part 3 of the Law Reform (Contributory Negligence and Apportionment of Liability) Act 2001 (SA) and Part VIA of the Competition and Consumer Act 2010 (Cth).