The decision

In Tesseract International Pty Ltd v Pascale Construction Pty Ltd [2024] HCA 24, the High Court of Australia determined that proportionate liability legislation may apply in arbitration proceedings.

The decision potentially creates practical challenges for claimants under existing arbitration agreements who may now need to commence further proceedings to fully recover their losses (if the respondent succeeds in a proportionate liability defence in the arbitration).

Going forward, parties should consider whether to expressly exclude proportionate liability regimes in their arbitration agreements, if they do intend that arbitration will finally resolve any disputes arising. Contracting out of proportionate liability is not available for arbitration agreements governed by Queensland law.

Background to the decision

Tesseract International Pty Ltd (Tesseract), an engineering consultancy, and Pascale Construction Pty Ltd (Pascale), a construction company, entered into a subcontract for Tesseract to provide engineering services in relation to the design and construction of a warehouse (Contract).

A dispute arose as to the quality of Tesseract's work, which was referred to arbitration in accordance with the arbitration agreement in the Contract.
In the arbitration, Pascale made a number of claims including a claim in negligence and a claim for misleading or deceptive conduct in contravention of section 18 of the Australian Consumer Law (ACL).

In its defence, Tesseract denied liability and in the alternative pled that any damages payable should be reduced by reason of Pascale's contributory negligence.

In its reply to the defence, Pascale denied that the proportionate liability provisions (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) (Consumer Act) applied to the arbitration.

All Australian jurisdictions have enacted proportionate liability legislation. The legislation replaces the common law principle of joint and several liability and requires a plaintiff to sue each wrongdoer who contributed to its loss. The legislation enables liability to be apportioned between wrongdoers, instead of the defendant being liable for the whole amount.

When applied in court proceedings, proportionate liability legislation enables a court to join responsible wrongdoers to proceedings to apportion liability between defendants in accordance with the legislation.

Tesseract applied to the South Australian Court of Appeal to determine a question of law pursuant to section 27J of the Commercial Arbitration Act 2011 (SA) (Domestic Arbitration Act).

The South Australian Court of Appeal

In Tesseract International Pty Ltd v Pascale Construction Pty Ltd [2022] SASCA 107, the Court of Appeal held that proportionate liability legislation was not available to be applied in the arbitration, unless expressly provided for in some form (eg in the arbitration agreement). The Court of Appeal's reasoning was that:

• it is an integral feature of proportionate liability that the plaintiff will have the opportunity to join all wrongdoers in the proceedings – this is not available in arbitration (except by consent);
• proportionate liability is commonly expressed in terms descriptive of 'court proceedings' and not extendable to arbitration proceedings; and
• there was no legislative intention for proportionate liability law to apply to arbitration proceedings.

The High Court of Australia

On 7 August 2024, the High Court delivered Tesseract International Pty Ltd v Pascale Construction Pty Ltd [2024] HCA 24, comprising five separate judgments.

By majority (Gageler CJ, Gordon and Gleeson JJ, and Jagot and Beech-Jones JJ), the High Court held that the proportionate liability provisions in the Law Reform Act and Consumer Act did apply to the arbitration. This was on the basis that proportionate liability legislation formed part of the substantive law of South Australia, which the parties had chosen to apply in the arbitration. Edelman J and Steward J wrote separate dissenting judgments, both holding that proportionate liability did not apply.

The judgments are analysed in more detail below.

Majority judgments: proportionate liability does apply to arbitration

Gageler CJ, Gordon and Gleeson JJ, and Jagot and Beech-Jones JJ formed the majority in three separate judgments, each holding that proportionate liability did apply to the arbitration.

Gageler CJ approached the primary question from the perspective of section 28 of the Domestic Arbitration Act, which provides that the arbitral tribunal must determine the dispute in accordance with such rules of law as are chosen by the parties. His Honour reasoned that the laws applicable to the dispute would be the same laws applicable to the substance of the dispute in a court in South Australia. The laws of South Australia included the proportionate liability provisions within the Law Reform Act and Consumer Act and, for that reason, proportionate liability did apply to the arbitration.

Gageler CJ answered the secondary questions – whether the subject matter of the dispute was incapable of arbitration and whether an arbitral award would conflict with public policy – in the negative, by reference to principles of statutory construction. His Honour reasoned that proportionate liability is a statutory regime and nothing in the legislation evinced a legislative intention to exclude arbitration. The public policy of South Australia includes the Domestic Arbitration Act and provides no basis for treating a dispute as inarbitrable where the relevant statutory laws of South Australia do not render the dispute inarbitrable.

Gordon and Gleeson JJ held that proportionate liability formed part of the law applicable to the resolution of the dispute (i.e. the law of South Australia), and that the laws were capable of modification for application to the arbitration. As to adapting the laws for arbitration, their Honours reasoned that the ability to compel joinder of all wrongdoers is not an integral feature of the laws given that the proportionate liability regime did not require a plaintiff to sue all wrongdoers in a single proceeding. While third parties are incapable of joinder in arbitration proceedings (without consent), that did not render the laws incapable of application to arbitration because, while the legislation enabled the possibility of joinder, the legislation did not require joinder.

As joinder was not an integral feature, and the legislation did not require a plaintiff to sue all wrongdoers in a single proceeding, the legislation could be adapted to apply to arbitral proceedings. On a practical note, Gordon and Gleeson JJ acknowledged that parties are free to contract out of the proportionate liability laws in any arbitration clause (e.g., by expressing that the parties' rights and liabilities at common law apply).

Jagot and Beech-Jones JJ considered that if there was no conflict with the public policy of South Australia in proportionate liability applying, then it was a matter of statutory and contractual interpretation whether the regime applied to the arbitration. On the statutory interpretation exercise, their Honours considered the only available inference was that the Commonwealth and South Australian Parliaments intended the legislation would apply in arbitration subject to the parties agreeing otherwise. On the contractual interpretation exercise, their Honours concluded that nothing in the contract supported a conclusion that the parties intended to exclude proportionate liability.

Dissenting judgments: proportionate liability does not apply to arbitration

The two dissenting judgments contain a number of interesting obiter comments regarding the appropriateness of proportionate liability to arbitral proceedings.

In concluding proportionate liability did not apply to the arbitration, Edelman J considered what the parties intended when entering into the arbitration agreement. His Honour noted that the rules of law were impliedly chosen by the parties: the arbitration agreement did not expressly provide for the seat of arbitration, the curial law of the arbitration, the procedure for the arbitration, or the substantive rules of the arbitration, however, the Contract was governed by the laws of South Australia.

As parties to an arbitration agreement intend their disputes to be finally resolved by arbitration, there was, in Edelman J's opinion, no 'rational basis to conclude the parties would wish to incorporate … law that would transform a dispute between themselves into a wider dispute with third parties which would require litigation for full resolution of the dispute' (at [215]).

Like Gordon and Gleeson JJ, Edelman J acknowledged that, going forward, parties may expressly exclude proportionate liability laws from application in an arbitration agreement. Practically, acknowledging that his judgment was in the minority, his Honour concluded that drafters of arbitration agreements must now bear in mind that proportionate liability laws may apply as part of the substantive law in Australian arbitrations. Parties should expressly exclude proportionate liability when drafting arbitration agreements (if the parties do intend that any arbitration will finally resolve any disputes).

Steward J's judgment identified a number of practical disadvantages of applying proportionate liability to arbitration:

• there is no means of compelling a respondent to disclose the identity of potential concurrent wrongdoers;
• even if a respondent were to name a concurrent wrongdoer, the claimant is unable to join the wrongdoer to the arbitral proceedings (unless the wrongdoer consents); and
• if the arbitral tribunal found the respondent proportionately liable, the claimant would be required to commence proceedings to sue the concurrent wrongdoer, however, in those subsequent court proceedings the court would not be bound by the arbitrator's findings.

Practical implications

Will this apply nationally to all proportionate liability legislation?

While the judgment concerned South Australian legislation, and the Consumer Act, proportionate liability legislation has been enacted in all States and Territories.

As the regime in each jurisdiction differs slightly, the consequence of the decision will need to be considered in the context of the proportionate liability legislation relevant to the arbitral agreement in question. For example:

• in South Australia, and under the Consumer Act, a defendant's liability may be reduced for concurrent wrongdoers, including those not a party to the proceedings: s 8(2)(b) of the Law Reform Act; and Consumer Act s 87CD(4);
• the legislation in the Australian Capital Territory, New South Wales, the Northern Territory, Queensland, Tasmania, and Western Australia, enables a court to apply proportionate liability even where a concurrent wrongdoer is not a party to the proceedings (like South Australia): Civil Law (Wrongs) Act 2002 (ACT) s 107F(4); Civil Liability Act 2002 (NSW) s 35(4); Proportionate Liability Act 2005 (NT) s 13(2)(b); Civil Liability Act 2003 (Qld) s 31(4); Civil Liability Act 2002 (WA) s 5AK(4); and Civil Liability Act 2002 (TAS) s 43B(4); and
• in Victoria, for proportionate liability to apply, all concurrent wrongdoers must be a party to the proceedings (unless dead or, if a corporation, wound up): Wrongs Act 1958 (VIC) s 24AI(3).

Given the Victorian legislation expressly requires concurrent wrongdoers to be a party to the proceedings (unlike the legislation considered by the High Court), there may be an argument that the Victorian proportionate liability regime is incapable of applying to arbitration proceedings.
Ultimately, when considering whether proportionate liability applies to an arbitration, the specific State or Territory legislation will need to be considered against a backdrop of the High Court's reasoning.

Can parties contract out of proportionate liability legislation in an arbitration agreement?

It depends on the laws applicable to the arbitration.

The proportionate liability legislation in New South Wales, Tasmania and Western Australia expressly permit parties to contract out of the proportionate liability regime. Queensland expressly bars contracting out. Every other jurisdiction is silent on the issue. Notably, Edelman J appeared to endorse that contracting out was permissible where the legislation is silent on the issue (for example, under the South Australian and Commonwealth legislation).

What should parties consider when drafting dispute resolution clauses and arbitration agreements?

Going forward, when negotiating dispute resolution clauses for large, multi-party projects, some parties may consider:

• broadening the scope of any arbitration agreement to include third parties (to account for proportionate liability), for example, by introducing linked dispute resolution mechanisms into every contract relevant to the project; or
• negotiating to 'carve out' proportionate liability legislation (noting that Queensland's legislation expressly bars contracting out).
  Ultimately, the decision may result in greater focus on negotiating an appropriate dispute resolution framework at project outset (e.g., by including linked disputes mechanisms).

Is the decision arbitration-friendly?

In our view the decision is arbitration friendly (in that the High Court's reasoning endorsed that arbitral awards will be enforceable by Australian courts save in limited circumstances), however, it may result in some unexpected challenges for parties to existing arbitration agreements who may not have contemplated that proportionate liability could apply to disputes resolved under those agreements.

Given the potential practical challenges for claimants going forward, the decision may cause parties to more carefully consider whether arbitration or litigation is most appropriate to resolve disputes arising under or in relation to their contract.

What does it mean practically for parties?

We anticipate the decision will have more practical consequences for claimants than respondents.

For respondents (except potentially those where the arbitration agreement is governed by the law of Victoria), the decision supports that they may rely on proportionate liability defences in arbitral proceedings in certain circumstances.

Claimants in arbitral proceedings may now face an additional challenge of recovering from concurrent wrongdoers following the conclusion of arbitral proceedings (where a defendant succeeds in a proportionate liability argument). The dissenting judgments summarised above highlight the practical complications parties (particularly claimants) may face in this situation.

Ultimately, to avoid these practical challenges, parties negotiating arbitration agreements should consider whether to expressly exclude the application of proportionate liability regimes (except arbitration agreements governed by Queensland law, because Queensland expressly bars contracting out).

Proportionate liability legislation may now apply to arbitrations where this was not the intent of the parties.

Parties with existing arbitration agreements should consider obtaining legal advice regarding the practical consequence of the High Court's decision (noting that there may be some jurisdictional differences between States and Territories).

Going forward, parties should ensure arbitration agreements expressly exclude proportionate liability (if this is the intent of the parties) and preserve the parties' rights and liabilities as at the common law.