High Court decision confirms proportionate liability regimes apply in arbitrations

The High Court of Australia has handed down a significant judgment in Tesseract International v Pascale Construction [2024] HCA 24, with a majority finding that the proportionate liability laws apply to arbitrations.

The case involved a contract for the provision of engineering consultancy work by Tesseract in connection with the development of a Bunnings Warehouse, and like many construction contracts, any dispute between Tesseract and Pascale was to be referred to arbitration.

A dispute regarding the standard of Tesseract’s work was referred for arbitration, with Pascale claiming damages for breach of contract, negligence, and various claims under the Australian Consumer Law.

Tesseract denied liability or alternatively contended that liability should be reduced by reference to the alleged concurrent wrongdoing of a third party in pursuant to the relevant proportionate liability legislation.

What is proportionate liability

Each state and territory in Australia has its own proportionate liability scheme, being:

• Part IVAA of the Wrongs Act 1958 (Vic);
• Part 4 of the Civil Liability Act 2002 (NSW);
• Part 2 of the Civil Liability Act 2003 (Qld);
• Part 3 of the Law Reform (Contributory Negligence and Apportionment of Liability) Act 2001 (SA);
• Part 1F of the Civil Liability Act 2002 (WA);
• Part 19A of the Civil Liability Act 2002 (Tas);
• Proportionate Liability Act 2005 (NT); and
• Chapter 8A of the Civil Law (Wrongs) Act 2002 (ACT).

Proportionate liability regimes offers a defence that may reduce a defendant’s liability for damages otherwise owing to a plaintiff for ‘apportionable claims’ by distributing the responsibility for loss among the defendant and any ‘concurrent wrongdoers’.

An ‘apportionable claim’ is a claim for economic loss or damage to property in an action for damages arising from a failure to take reasonable care, whereas a ‘concurrent wrongdoer’ is one or more persons whose acts or omissions caused, independently of each other or jointly, the loss or damage that is the subject of the claim.

If pleaded as a defence, the court assesses the extent of each concurrent wrongdoer’s responsibility and assigns a percentage of the total damages accordingly, which can involve complex evaluations of lay and expert evidence.

This framework is commonly used in cases involving multiple defendants, such as professional negligence, construction disputes, and financial services. It aims to fairly distribute the financial burden among those responsible, and prevents plaintiffs targeting litigation against a specific deep-pocketed or well insured defendant.

What about arbitrations?

The applicability of proportionate liability regimes in arbitrations has long been a contested issue. Unlike courts, arbitrators lack the authority to compel third parties to partake in arbitrations, except by the consent of the parties involved and the relevant third party. This is consistent with the nature of arbitration which is ordinarily a privileged, flexible and party-controlled method of alternative dispute resolution process.

Because of the inability to join third parties to arbitrations, and because the proportionate liability laws contemplate the possibility for joinder of all parties in one proceeding, to date, it has been the practice that proportionate liability does not apply to arbitrations.

The decision

The High Court held, by majority, that the proportionate liability laws of South Australia apply in the arbitration. The Court found that the inability to join all alleged concurrent wrongdoers to the arbitration does not mean that the proportionate liability laws are inapplicable, because while proportionate liability laws permit the possibility of joinder, each scheme also accepts that joinder may not always be possible.

The majority found that the application of the proportionate liability laws in an arbitration, where there is no power of joinder in the absence of consent, would not change the legal operation of those laws to such an extent that the laws cannot be described as the substantive laws of South Australia.

While the case before the High Court only considered the proportionate liability laws of South Australia and as contained in Pt VIA of the Competition and Consumer Act 2010 (Cth), the decision is highly likely to apply to the proportionate liability schemes in each State and Territory in Australia.

Practical impacts and takeaways

This decision is significant for parties involved in arbitrations.

For a respondent party involved in arbitrations where concurrent wrongdoers can be identified, the liability of that respondent may now be reduced to the proportion of that party’s responsibility having regard to the conduct of those concurrent wrongdoers.

In turn, claimants are likely to face uncertainty and delays when pursuing third parties to recover their loss after a respondent successfully reduces its liability in arbitration. To that end, it can often be difficult to accurately determine the degree of fault for each party, leading to potentially lengthy and complex litigation. Additionally, and perhaps most significantly, it may result in insufficient compensation for the claimant if concurrent wrongdoers are insolvent or unable to pay their share.

For parties who wish to have arbitrations that exclude the relevant proportion liability scheme, that will depend on the jurisdiction of the dispute. The proportionate liability provisions in NSW, TAS and WA expressly permit parties to ‘contract out’ of proportionate liability, however, contracting out is prohibited in QLD, whereas VIC, ACT, SA and NT are silent about the ability to contract out.

Further, unlike all other proportionate liability schemes, the VIC legislation requires concurrent wrongdoers to be joined to the proceeding (s24AI(3) of the Wrongs Act 1958), which casts doubts about whether proportionate liability can apply in arbitrations in VIC.

Accordingly, parties and practitioners should be cognisant of the following practical implications of this decision, namely:

• if agreeing to arbitral resolution, the appropriateness of the governing law of the contract and the relevant proportionate liability scheme for that State or Territory;
• the necessity of referring a matter to arbitration in instances where it is anticipated that multiple parties may be subject to the same dispute, and if arbitration is unavoidable, consider if there is a process whereby the consent of multiple respondents, to participate in a single arbitration, can be obtained in advance; and
• if applicable in the relevant State or Territory, whether parties agree to exclude the application of proportionate liability legislation.

As for existing contracts entered into prior to this decision, a consequence of this decision may be that those parties will likely be bound by the relevant proportionate liability laws.

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Authored by:

Michael Harty, Partner
Monique Kotevski, Lawyer