High Court rules that proportionate liability is applicable in arbitration

Further to our short article (click here to view) on the day judgment was delivered for the High Court decision Tesseract International Pty Ltd v Pascale Construction Pty Ltd [2024] HCA 24 (Tesseract), here is our full article on this important decision.

The High Court of Australia determined in Tesseract that for contracts governed by South Australian law, parties can rely on the proportionate liability legislation in arbitrations to reduce their liability to the extent of their contribution to the wrongdoing unless the parties have expressly contracted out of the application of the proportionate liability legislation.

The High Court’s decision has contradicted the widely understood view that proportionate liability regimes do not apply to commercial arbitrations.¹

The effect of this decision is that parties who agree to dispute resolution by arbitration may be forced to later pursue third parties in separate proceedings, ultimately increasing the time and cost of the dispute resolution process.

What is proportionate liability?

Each state and territory has enacted ‘proportionate liability’ legislation that deals with claims in respect of property damage and pure economic loss.

Under the proportionate liability legislation, each concurrent wrongdoer’s liability is limited to the proportion of loss that the court considers just, having regard to the respective wrongdoers’ contributions to the property damage and economic loss.

The ability to contract out of proportionate liability regimes differs between states and territories. New South Wales, Western Australia and Tasmania allow contracting out. Queensland prohibits parties to contract out of the regime. The other states and territories are silent on this issue.

Background of the dispute

The appellant, Tesseract, entered a consultancy contract with the respondent, Pascale, whereby Tesseract was to provide engineering services to Pascale in relation to the design and construction of a Bunnings Warehouse building in South Australia.

There was a dispute about whether Tesseract’s work was performed in accordance with the contract and the dispute was referred to arbitration.

In the arbitration, Tesseract argued that its liability (if any, which was denied) should be reduced in accordance with the proportionate liability regime in Part 3 of the Law Reform Act (Contributory Negligence and Apportionment of Liability) Act 2001 (SA) or Part VIA of the Competition and Consumer Act 2010 (Cth).

The arbitrator was unsure whether such legislation applied in an arbitration and referred the matter to the South Australia Court of Appeal as a preliminary question of law.

The Court of Appeal decided that the legislation did not apply to arbitration.

The High Court decision

The High Court overturned the Court of Appeal decision deciding that the proportionate liability regimes under the Law Reform Act 2001 (SA) (LRA) and the Competition and Consumer Act 2010 (Cth) (CCA) do apply in arbitrations.

The majority of the High Court held that:

1. Parties can choose the substantive and the procedural law that will govern the arbitration along with the seat or place of the arbitration.
2. The parties had selected the substantive law of South Australia to govern the arbitration. The substantive law of South Australia included the proportionate liability legislation. The language used in that legislation is referable to arbitral and court proceedings.
3. South Australian law does not prevent a party from contracting out of the proportionate liability laws in any arbitration clause.
4. The inability of a claimant to join wrongdoers to arbitration proceedings (except by agreement) and the consequential need to bring multiple proceedings to recover all losses, does not mean that the proportionate liability legislation is excluded from the scope of an arbitration.

The court took the opportunity to make the following general comments about Australian arbitrations.

Edelman J states:²
“Unless legislation alters the law in some or all Australian States, the result of this appeal is that drafters of arbitration agreements must now be aware that the widespread consensus over the last decade no longer applies in Australia. Proportionate liability laws will usually (but not necessarily always) apply as part of the substantive law in Australian arbitrations.”

Steward J states:³
“The result in this appeal highlights the limitations of arbitration. The fashionable trumpeting of the arbitral resolution of disputes may have overstated its virtues. Some disputes are better resolved in a court of law.”

Key takeaways

When drafting dispute resolution provisions, parties should consider:

1. whether litigation in court or arbitration is the most appropriate forum for resolving a dispute, particularly if it is a multi-party dispute;
2. whether the proportionate liability regime can and should be excluded in the relevant state or territory;
3. if the relevant proportionate liability legislation is not excluded, parties that agree to dispute resolution by arbitration may be required to bring separate proceedings against third parties, increasing the time and cost of the dispute resolution process; and
4. where separate proceedings are required to be brought against third parties, there is a risk that a court’s determination of liability will differ from the arbitral tribunal and a plaintiff may not be able to recover all of its loss.

This article should not be relied on as legal advice. If you require assistance or advice, including for matters relating to this article, we are happy to help.

This article was written by Kevin Lock, Partner, Tara Nelson, Senior Associate and Brooke Rasmussen, Solicitor.

¹Curtin University of Technology v Woods Bagot Pty Ltd [2012] WASC 449 and Aquagenics Pty Ltd v Break O’Day Council [2010] TASFC 3.

²At [227].

³ At [283].