Arbitrations are generally considered an ideal mechanism for facilitating a fair and final resolution of commercial disputes, to seek to avoid unnecessary delay and expense.[1] Parties may also find arbitrations appealing due to the autonomy to select the seat of arbitration, procedure to govern the arbitration and the powers of the tribunal.[2] However in Tesseract International Pty Ltd v Pascale Construction Pty Ltd [2024] HCA 24 (Tesseract), the High Court considered the applicability of proportionate liability in arbitrations and the decision emphasises the importance of considering whether arbitrations provide the best or most appropriate forum for resolving disputes involving multiple wrongdoers.
Background to Tesseract
Pascale contracted with Tesseract to provide consultancy services for the design and proposed construction of a Bunnings warehouse in Windsor Gardens, South Australia. Pascale engaged a third party, Mr Penhall, to assist with preparing the tender for the design and construction of the warehouse.
The contract provided that any dispute between the contracting parties ‘in connection with’ the contract, could be referred to arbitration if not resolved by dispute conciliation.[3] South Australia was selected as the place of Arbitration.
Pascale commenced arbitral proceedings claiming that, in providing the engineering consultancy services to Pascale, Tesseract was negligent and engaged in misleading or deceptive conduct in trade or commerce.[4] Consequently, Pascale claimed to have suffered economic loss and sought damages.
Tesseract denied these allegations and claimed that in the alternative, if it were to be liable to Pascale, Mr Penhall was a wrongdoer who shared responsibility for Pascale’s loss. Therefore the damages for which Tesseract was liable ought to be reduced by application of South Australia and the Commonwealth’s proportionate liability regime, pursuant to Part 3 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). However, as Mr Penhall was not a party to the contract between Pascale and Tesseract, he could not be joined as a party to the arbitration in the absence of consent.
The decision of the Court of Appeal of the Supreme Court of South Australia
The Arbitrator referred the issue concerning the applicability of the proportionate liability regime provided in Part 3 of the Law Reform Act and/or Part VIA of the Commercial Arbitration Act to the Court of Appeal of the South Australian Supreme Court[5] for determination.
The Court of Appeal answered the question in the negative and held that the proportionate liability legislation did not apply. Tesseract appealed to the High Court.
The High Court’s decision
By a 5:2 majority,[6] the High Court held that proportionate liability legislation was applicable to arbitrations. The reasons are lengthy and complex. In essence, the majority held that the proportionate liability legislation could apply in an arbitration without changing the legal operation of those laws to such an extent that they could not be described as the substantive laws of South Australia. Having reached that finding, the High Court further clarified that:
Proportionate Liability Regimes in Australia
The proportionate liability provisions in South Australia are similar to those in the Australian Capital Territory,[9] New South Wales,[10] the Northern Territory,[11] Western Australia,[12] Tasmania[13] and Queensland.[14] That is, liability can be apportioned between concurrent wrongdoers, even if they are not parties to the proceedings.
In Victoria however, proportionate liability will only apply if all concurrent wrongdoers are a party to the proceedings (unless the person is deceased, is a corporation or the corporation has been wound up).[15]
The Tesseract judgment will likely be directly applicable in all States and Territories except for Victoria. Even then, parties with contracts whose governing law is that of Victoria, can still be guided by the Court’s reaffirmation of the principles set out in Codelfa Construction Pty Ltd v State Rail Authority of New South Wales[16] as to an arbitral tribunal’s ability to incorporate the substantive laws of the jurisdiction in which it is seated, subject to modifications in language used.[17]
Relevant Considerations
For Claimants
The Tesseract decision means that claimants will need to carefully evaluate if arbitration is the most efficient and cost-effective mechanism for resolving disputes involving concurrent wrongdoers. In these situations, arbitration may not be able to facilitate a ‘final resolution’ of a dispute. Notably, if proportionate liability regimes apply to an arbitral dispute, claimants may need to commence separate court proceedings against wrongdoers who are not parties to a contract, to recover the full quantum of their loss. A complication arising from this is that a Court is not bound or influenced by the arbitrator’s findings on the conduct and responsibility of other concurrent wrongdoers.[18] Claimants may therefore face the risk of obtaining conflicting judgments from a court in subsequent proceedings.[19]
This does not mean that arbitrations lose their value in disputes involving concurrent wrongdoers. Parties retain the ability to choose the place of arbitration, and therefore the law applicable to the substance of their dispute, and the construction of their dispute resolution clauses.
Further, South Australian law does not prevent parties from expressly excluding the application of relevant proportionate liability regimes.
For Respondents
At first glance, the majority decision may appear favourable towards respondents, as their liability can be limited by proportionate liability legislation (if applicable). Where a proportionate liability regime does apply, the only onus borne by the respondent is the onus of disclosing the identity of and notifying the claimants of any concurrent wrongdoers. This obligation is enforceable with an award of costs.[20]
For Contracting Parties
While the effect of the decision is that the claimant was disadvantaged vis-à-vis the respondent, it must be remembered that when negotiating an arbitration clause the parties will not know which side of any dispute they will end up on. Accordingly, when entering into a contract with an arbitration clause, parties should consider the impact of the proportionate liability legislation from the perspective of both a claimant and respondent.
Key Takeaways
The application (or exclusion) of proportionate liability to an arbitral dispute involving multiple wrongdoers, should be assessed on a case-by-case basis. This requires careful consideration of the applicable proportionate liability regime in each jurisdiction. The interpretation of the arbitration agreement in Tesseract, whilst relevant, does not dictate the analysis of other agreements that provide for an arbitration to be governed by the substantive law of an Australian state.[21] Parties with arbitral agreements that are yet to be concluded may find legal advice on the potential impact of proportionate liability regimes to their dispute instructive.
[1] The paramount object of Arbitration pursuant to sections 1C(1) and 1C(3) of the Commercial Arbitration Act 2011 (SA). This paramount object is mirrored in the relevant commercial arbitration act for each Australian jurisdiction.
[2] Tesseract International Pty Ltd v Pascale Construction Pty Ltd [2024] HCA 24, [87] (Gordon and Gleeson JJ).
[3] Tesseract International Pty Ltd v Pascale Construction Pty Ltd [2024] HCA 24, [79] (Gordon and Gleeson JJ).
[4] Tesseract International Pty Ltd v Pascale Construction Pty Ltd [2024] HCA 24, [286] n 292 (Jagot and Beech-Jones JJ), citing sections 18 and 236 of Australian Consumer Law.
[5] Comprising President Livesey, Justices Doyle and Bleby.
[6] Majority comprising Chief Justice Gageler, Justices Gordon and Gleeson, Jagot and Beech-Jones. Justices Edelman and Steward dissented.
[7] Tesseract International Pty Ltd v Pascale Construction Pty Ltd [2024] HCA 24, [131] (Gordon and Gleeson JJ).
[8] Tesseract International Pty Ltd v Pascale Construction Pty Ltd [2024] HCA 24, [134] (Gordon and Gleeson JJ).
[9] Civil Law (Wrongs) Act 2002 (ACT) s 107F(4).
[10] Civil Liability Act 2002 (NSW) s 35(4).
[11] Proportionate Liability Act 2005 (NT) s 13(2)(b).
[12] Civil Liability Act 2002 (WA) s 5AK(4).
[13] Civil Liability Act 2002 (Tas) s 43B(4).
[14] Civil Liability Act 2003 (Qld) s 31(4).
[15] Wrongs Act 1958 (Vic) s 24AI(3).
[16] Codelfa Construction Pty Ltd v State Rail Authority of New South Wales (1982) 149 CLR 337.
[17] See for example Tesseract International Pty Ltd v Pascale Construction Pty Ltd [2024] HCA 24, Gleeson and Gordon JJ at [95] and [99], Edelman J at [182], Steward J at [265] and Beech-Jones and Jagot JJ at [357].
[18] Tesseract International Pty Ltd v Pascale Construction Pty Ltd [2024] HCA 24, [265] (Steward J).
[19] Curtin University of Technology v Woods Bagot Pty Ltd [2012] WASC 449, [86] (Beech J).
[20] Tesseract International Pty Ltd v Pascale Construction Pty Ltd [2024] HCA 24, [262] (Steward J).
[21] Tesseract International Pty Ltd v Pascale Construction Pty Ltd [2024] HCA 24, [225] (Edelman J).
