The High Court gives proportionate liability in arbitration the green light

In its recent decision of Tesseract International Pty Ltd v Pascale Construction Pty Ltd [2024] HCA 24, the High Court of Australia has provided some clarity on the application of proportionate liability to arbitrations.

By majority, the High Court held that the proportionate liability laws of the Law Reform (Contributory Negligence and Apportionment of Liability) Act 2001 (SA) (Law Reform Act) and Part VIA of the Competition and Consumer Act 2010 (Cth) (CCA) can apply in arbitration, unless expressly excluded by the parties.

Background

Pascale Construction Pty Ltd (Pascale) engaged Tesseract International Pty Ltd (Tesseract) for engineering consultancy work in connection with building Pascale’s design of a multilevel warehouse building in South Australia. There was a dispute between the parties as to whether Tesseract’s work met the standard required under the contract, with Pascale claiming damages for breach of contract, negligence and misleading or deceptive conduct. The contract included an arbitration agreement, which Pascale invoked.

Tesseract denied liability and alternatively contended damages should be reduced to reflect Pascale’s contributory negligence; or, in the further alternative, reduced to reflect the proportionate liability of a third party concurrent wrongdoer engaged by Pascale to assist with the preparation of the tender for the warehouse design and construction. Tesseract relied on the proportionate liability regimes under the Law Reform Act and Part VIA of the CCA.

Pascale agreed the defences formed part of the dispute, but denied the applicability of the proportionate liability provisions in the arbitration proceedings.

Court of Appeal decision

An application for the determination of a question of law arising in the course of an arbitration, under section 27J of the Commercial Arbitration Act 2011 (SA) (Arbitration Act), was made to the South Australian Court of Appeal.

Tesseract argued that, by reason of an implied term, the arbitrator has authority to grant the parties any relief that would have been available in a Court of appropriate jurisdiction. Conversely, Pascale emphasised the private and consensual nature of an arbitration that should not be able to bind third parties that did not enter such contract.

The Court of Appeal held that the proportionate liability regime does not apply to arbitration proceedings. Central to the Court of Appeal’s decision was a finding that whereas the proportionate liability laws contemplated an opportunity to join all wrongdoers to one set of proceedings, there was a need for consent from all parties to join wrongdoers to an arbitration.

Tesseract sought, and was granted, Special Leave to appeal to the High Court.

High Court

The High Court held, by majority, that the proportionate liability laws are not expressly excluded from arbitration and can be modified to apply to arbitration without losing their integrity.

When parties do not specify a substantive law for arbitration, the Arbitration Actmandates applying the law deemed appropriate by the tribunal. This means proportionate liability laws can apply unless explicitly excluded.

One contentious point was whether provisions for joinder of all wrongdoers could be adapted for arbitration. The majority found that just because a third party cannot be joined to arbitration without their consent, it does not mean proportionate liability laws are inapplicable.

An arbitral tribunal is competent to apply proportionate liability provisions by modifying the language to fit the arbitral context, even if these provisions are not expressly designed for arbitration.

Judicial Observations

• Steward J: found thatthe parties did not exclude proportionate liability laws from their arbitration agreement. Hence, in arbitration the dispute should be determined in accordance with the substantive provisions of the proportionate liability regimes, as substantive law of South Australia.[1]
• Gordon and Gleeson JJ: emphasised that the inability to join all wrongdoers does not negate the applicability of proportionate liability laws in arbitration. Both the CCA and the Law Reform Act provide for the possibility and the fact of non-joinder of third parties, but neither require actual joinder.[2]
• Jagot and Beech-Jones JJ: considered the intent of the introduction of the proportionate liability regimes, namely to ensure the “viability of Australia's insurance market for professional services”[3]and that Pascale’s premise that it cannot join all potential concurrent wrongdoers to the arbitration with the consequence that proportionate liability regimes “are not appropriate to” arbitration is irreconcilable with the context in which the proportionate liability regimes were enacted, and their substance, as neither the CCA nor the Law Reform Act ensure that a plaintiff can join all potential concurrent wrongdoers.[4]

Their Honours highlighted that the inability to join third parties is more about the arbitration agreement than about the proportionate liability laws. They underscored that an arbitrator’s limitations in granting relief do not equate to being unable to provide appropriate relief altogether.[5] It was open to Pascale to seek agreed terms from all of its consultants for joint or single arbitration arising from a contractual dispute.[6]

“Pascale's argument … overlooks the fundamental difference between an arbitrator not being able to give a party all the relief that the party might obtain from a court and an arbitrator being able to give a party relief that it could never obtain in a court” [7]

Implications

The High Court’s ruling marks a pivotal shift in how proportionate liability laws intersect with arbitration, reshaping both contractual and dispute resolution strategies. By confirming that these laws can be adapted for arbitration has implications for contractual risk management strategies.

While the ruling directly addresses the CCA and the Law Reform Act regimes, its underlying principles no doubt to extend to other jurisdictions unless specifically altered by legislation. For contracting parties, this underscores the importance of explicitly stating their intentions regarding the application of proportionate liability laws in their contracts or negotiating arbitration agreements consenting to joinder.

For the insurance industry, this decision could significantly impact coverage and liability frameworks, with proportionate liability contracting out provisions, where permissible, to likely become much more prevalent. Insurers and Underwriters should be aware of these changes in reviewing their insurable risks.