Welcome certainty or a "radical" development? Proportionate liability laws apply in arbitrations in Australia

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

What you need to know

• The High Court of Australia has confirmed that proportionate liability laws form part of the "law of the land" in Australia and will apply in arbitrations unless they are excluded by the parties in their contract.
• In Australia, each State and Territory jurisdiction has implemented proportionate liability laws.  These laws provide that each party who has caused another party loss or damage for certain apportionable claims (including claims for a failure to take reasonable care and misleading or deceptive conduct) will only be liable for their share of responsibility for the loss or damage. The injured party was previously permitted to seek compensation for the full extent of their loss and damage from any of the individual wrongdoers prior to the introduction of the proportionate liability laws.
• Respondents in arbitrations can rely on proportionate liability laws to reduce their liability for apportionable claims reflecting the loss and damage caused by third parties, even though the third parties may not be – and may not be able to be required to be – a party to the arbitration.
• Parties entering into arbitration agreements should carefully consider their choice for the governing law of their contract, the ability for third parties to be a party to any arbitration, whether to exclude the application of proportionate liability laws, and whether arbitration is the most appropriate way to resolve their disputes.

What you need to do

Commercial parties entering into contracts governed by Australian law and containing arbitration clauses should consider taking the following steps in light of Tesseract:

• Choice of governing law: parties should be aware that a choice of governing law of an Australian State or Territory includes the proportionate liability laws of that jurisdiction. Parties should consider the potential application of those laws – which are not uniform – when making their choice of law.
• Exclusion of proportionate liability provisions: parties should consider whether to exclude the application of proportionate liability laws if this is permitted by their governing law so that a wrongdoer may not reduce their liability to an injured party for apportionable claims in their arbitration.¹
• Multiparty arbitrations: parties should consider including provisions that facilitate the joinder of third parties in their arbitration or requiring counterparties to have “back-to-back” arbitration agreements that facilitate the consolidation of multiple arbitrations, particularly where the application of proportionate liability laws is not excluded in their contract. If the application of proportionate liability laws is not excluded, and a multiparty arbitration may not be possible, some parties may consider litigation to be more suitable for resolving their disputes due to the ability to require third parties to be a party to any litigation.
• Strategic considerations for disputes: an injured party in an arbitration may need to bring separate court proceedings against any third party wrongdoer to recover all of their loss and damage if the application of proportionate liability laws is not excluded. Injured parties in ongoing or prospective arbitrations in respect of which the application of proportionate liability laws is not excluded should consider the utility of bringing apportionable claims in circumstances where alternative non-apportionable claims are available.
• Reviewing existing contracts: parties should review their existing contracts to determine whether proportionate liability laws may apply in their arbitrations and to confirm whether the result is consistent with their strategic interests. Amendments may be necessary to ensure that their arbitrations will proceed as intended. 

Legislative and procedural background

The decision in Tesseract concerns the interaction between the proportionate liability laws in Australia and the UNCITRAL Model Law on International Commercial Arbitration (Model Law) as adopted in Australia through the International Arbitration Act 1974 (Cth) and uniform laws that apply to "domestic commercial arbitrations" in each State and Territory.²

Proportionate liability laws

The approach to determining the respective liability of “concurrent wrongdoers” (separate parties who have caused loss or damage) to an injured party varies across the world.³ In Australia, each State and Territory jurisdiction has implemented proportionate liability laws.⁴ These laws provide that each concurrent wrongdoer will only be liable for their share of responsibility for the loss or damage suffered by the injured party for certain apportionable claims (including claims for a failure to take reasonable care and misleading or deceptive conduct). The injured party may therefore join each concurrent wrongdoer to a single litigation in court to recover all of their loss and damage (or commence separate litigations against each concurrent wrongdoer). Injured parties were permitted to sue any wrongdoer for the full extent of their loss and damage prior to the introduction of the proportionate liability laws.

Queensland is the only State jurisdiction which expressly prohibits contracting out of the proportionate liability laws, with the others either expressly permitting contracting out or being silent on the issue.⁵

Model Law

Australia has been supportive of arbitration as a method for resolving commercial disputes. This positive stance is reflected in its adoption of the Model Law. The Model Law was developed by the United Nations Commission on International Trade Law (UNCITRAL) to assist countries to reform and modernise their laws on arbitral procedure to address the particular needs of international commercial arbitration.⁶

The adoption of the Model Law promotes the standardisation of rules applying to arbitration between Australia and other Model Law jurisdictions, and between States and Territories in Australia, and reduces the uncertainty arising from variation in arbitral procedure between jurisdictions.⁷

Interaction between proportionate liability laws and Model Law

The interaction between the proportionate liability laws and the Model Law has given rise to uncertainty in Australia for many years. 

This uncertainty has principally arisen in relation to the question of whether the proportionate liability laws apply in arbitrations in circumstances where:

• Article 28 of the Model Law requires arbitral tribunals to decide any arbitration in accordance with the law applicable to the substance of the dispute (which may be chosen by the parties or determined in accordance with conflict of laws principles);
• each State and Territory in Australia has implemented proportionate liability laws which include substantive laws that limit the liability of all concurrent wrongdoers to the extent of their contribution to the relevant loss and damage; and
• potential third party concurrent wrongdoers may not consent to be – and may not be able to be required to be – a party to the arbitration such that an injured party is not able to join each concurrent wrongdoer to a single arbitration or litigation.

Over the years it has variously been proposed that the proportionate liability laws should expressly or should expressly not apply in arbitrations to resolve this uncertainty. These proposals have been contentious (a proposal for proportionate liability laws to apply in arbitration was described as a "radical" threat to the "the future of domestic arbitration in Australia") and none have been adopted.⁸

Court have instead previously resolved the question of whether the proportionate liability laws apply in arbitrations in the negative, as the South Australian Court of Appeal did at first instance in Tesseract International Pty Ltd v Pascale Construction Pty Ltd [2022] SASCA 107.⁹

Confirmation that proportionate liability laws apply in arbitrations 

The dispute

Tesseract International Pty Ltd (Tesseract) was engaged by Pascale Construction Pty Ltd (Pascale) to provide engineering consultancy services for the design and construction of a Bunnings warehouse under a subcontract governed by the laws of South Australia and dated 14 October 2015 (Contract). 

A dispute regarding the quality of Tesseract's work arose which was referred to arbitration. Tesseract denied any liability. One of Tesseract's alternative arguments was that any liability that it had should be reduced under the relevant proportionate liability laws because there was a third party concurrent wrongdoer (an individual engaged by Pascale to assist with its tender for the design and construction of the warehouse). Pascale denied the applicability of the proportionate liability laws in the arbitration.

The arbitrator referred the issue of the applicability of the proportionate liability in the arbitration to the Supreme Court of South Australia under s 27J of the Commercial Arbitration Act 2011 (SA) (Commercial Arbitration Act). The Supreme Court of South Australia then referred the question for determination by the Court of Appeal.¹⁰

The question for determination was whether the proportionate liability laws in South Australia applied to the arbitration. Those laws are contained in Part 3 of the Law Reform (Contributory Negligence and Apportionment of Liability) Act 2001 (SA) (Law Reform Act) and/or Part VIA of the Competition and Consumer Act 2010 (Cth) (CCA).

The arguments

Tesseract argued that the proportionate liability laws constitute part of the "law of the land" in South Australia. It followed that the arbitrator was required to apply proportionate liability under section 28(3) of the Commercial Arbitration Act (which mirrors article 28 of the Model Law) or under the arbitrator's implied power to determine the dispute as if in a court.¹¹

Pascale argued that the proportionate liability laws were not applicable in an arbitration. In doing so, Pascale emphasised the private and consensual nature of arbitration and the difficulty in joining third parties to arbitrations.¹² It submitted that the inability to apply critical features of the proportionate liability laws in arbitrations, such as the joinder of third parties without consent, would mean that the arbitrator would be implementing laws that are different from the Law Reform Act and the CCA and not the law of South Australia.¹³

The decision

The High Court decided that proportionate liability laws apply in arbitrations by a 5 – 2 majority. 

In summary:

• The majority considered that the proportionate liability laws in the Law Reform Act and CCA are part of the substantive law of South Australia and that the arbitrator was required to apply them in the arbitration. Their relevant central features are to limit a concurrent wrongdoer's liability. It was no barrier to the applicability of these central features that other features (such as joinder of third party concurrent wrongdoers) could not apply in the arbitration. This is because the legal operation of the central features was not altered by the inapplicability of the other provisions and the laws could apply with the statutory language "translated" or "adapted" to make it applicable to the arbitration.¹⁴ 
• The minority considered that the proportionate liability laws in the Law Reform Act and CCA are not confined to limiting the liability of concurrent wrongdoers and that the proportionate liability regimes needed to be considered and applied holistically.¹⁵ As the provisions empowering a court to join third party concurrent wrongdoers could not apply in the arbitration, the minority reasoned that the tribunal could only apply an abridged version of the proportionate liability laws, which would not reflect the law of South Australia.¹⁶

Analysis

The outcome of the High Court's decision is beneficial for prospective respondents in arbitrations that are concurrent wrongdoers for apportionable claims under the proportionate liability laws of Australia. Their liability will be capped according to the proportion of their responsibility of the loss and damage suffered by the injured claimant. However, this will mean that prospective claimants need to identify and join (or pursue separate proceedings against) third party concurrent wrongdoers, which burdens them with the expense of initiating further proceedings and the risk of not recovering the full extent of their loss and damage.  It will also potentially mean that the resolution of disputes may become more fragmented and less efficient, which may have broader industry and public policy implications going forward.

As parties to energy, resources, construction and infrastructure contracts in Australia often use arbitration to resolve their disputes, which in turn may often involve multiple parties, Tesseract necessitates a careful consideration of existing and future arbitration agreements.

It is notable that Edelman J was highly critical of this shift in the law in his Honour's dissenting judgment, commenting that the previous position that proportionate liability laws did not apply in arbitrations reflected an underlying interpretative approach to arbitration agreements based on a policy of minimal curial intervention, and that it was "quite another thing for an arbitration agreement to include proportionate liability laws that both limit liability and distribute (and therefore widen) a dispute beyond the parties, and therefore beyond an arbitration, to require curial involvement".¹⁷ His Honour further reasoned that this distribution of liability to non-parties would be contrary to the "paramount object" of facilitating the final resolution of disputes in arbitration.¹⁸

Given the split of the High Court's reasons, and the strength of the dissenting judgments, it is likely that the interaction between the proportionate liability laws and the Model Law will continue to be subject of the debate absent legislative intervention. In the meantime, it remains to be seen whether commercial parties entering into contracts and using arbitration in Australia will welcome the certainty provided by Tesseract or regard it as a "radical" development. 

Endnotes

^{1. An example of an exclusion clause is clause 44.5 of the contract in Transurban v CPB [2020] VSC 476: "to the extent permitted by law, the arbitrator will have no power to apply or to have regard to the provisions of any proportionate liability legislation which might have applied to any dispute referred to in arbitration". Also, see: Aquagenics Pty Ltd v Break O'Day Council (2010) 20 Tas R 239.}

^{2. Commercial Arbitration Act 2010 (NSW); Commercial Arbitration (National Uniform Legislation) Act 2011 (NT); Commercial Arbitration Act 2013 (Qld); Commercial Arbitration Act 2011 (SA); Commercial Arbitration Act 2011 (Tas); Commercial Arbitration Act 2011 (Vic); Commercial Arbitration Act 2012 (WA); Commercial Arbitration Act 2017 (ACT).}

^{3. For example, in England and Wales joint and several liability, many civil law jurisdiction maintain joint and several liability approaches (including France, Germany, Spain, the United Arab Emirates and Qatar), and the approach in the United States varies between State jurisdictions, where some states have maintained a traditional joint and several liability system while others have adopted a proportionate liability system (and may also differ for contractual versus tortious liability).}

^{4. Civil Liability Act 2002 (NSW), Pt 4; Civil Liability Act 2003 (Qld), Pt 2; Law Reform (Contributory Negligence and Apportionment of Liability) Act 2001 (SA), Pt 3; Civil Liability Act 2002 (Tas), Pt 9A; Wrongs Act 1958 (Vic), Pt IVAA; Civil Liability Act 2002 (WA), Pt 1F; Civil Law (Wrongs) Act 2002 (ACT), Ch 7A; Proportionate Liability Act 2005 (NT). See also legislation at the federal level: Competition and Consumer Act 2010 (Cth), Pt VIA; Corporations Act 2001 (Cth), Pt 7.10 Div 2A; Australian Securities and Investments Commission Act 2001 (Cth), Pt 2 Subdiv GA.}

^{5. Civil Liability Act 2003 (Qld) s 7(3).}

^{6. UNCITRAL Model Law on International Commercial Arbitration, adopted 1985, incorporating 2006 amendments.}

^{7. Janet Walker and Doug Jones, "Australian Domestic Arbitration: One Country United under the Model Law", Kluwer Arbitration Blog (1 September 2022).}

^{8. Tesseract International Pty Ltd v Pascale Construction Pty Ltd [2024] HCA 24 at [208] (Edelman J), citing Albert Monichino, "Arbitration Law in Victoria Comes of Age" (2012) 31(1) The Arbitrator & Mediator 41.}

^{9. Following Aquagenics Pty Ltd v Break O’Day Council [2010] TASFC 3 and Curtin University of Technology v Woods Bagot Pty Ltd [2012] WASC 449.}

^{10. Section 27J of the Commercial Arbitration Act 2011 (SA) gives the court jurisdiction, on application, to determine any question of law arising in the course of the arbitration.}

^{11. Appellant's written submissions at [16]–[37].} 

^{12. Respondent's written submissions at [74]–[78].} 

^{13. Respondent's written submissions at [93]–[99].} 

^{14. Tesseract International Pty Ltd v Pascale Construction Pty Ltd [2024] HCA 24 at [63]–[64] (Gageler CJ), [130] and [138] (Gordon and Gleeson JJ), and [360]]–[364] (Jagot and Beech-Jones JJ).} 

^{15. Tesseract International Pty Ltd v Pascale Construction Pty Ltd [2024] HCA 24 at [145] (Edelman J), and [263]–[267] (Steward J).}

^{16. Tesseract International Pty Ltd v Pascale Construction Pty Ltd [2024] HCA 24 at [152] (Edelman J) and [280] (Steward J).}

^{17. Tesseract International Pty Ltd v Pascale Construction Pty Ltd [2024] HCA 24 at [226] (Edelman J).}

^{18. Tesseract International Pty Ltd v Pascale Construction Pty Ltd [2024] HCA 24 at [222] (Edelman J).}

Authors: Luke Carbon, Partner; Thomas Gaffney, Senior Associate; Christina Han, Lawyer and Caroline Xu, Graduate.