Tesseract v Pascale - a welcome default position on proportionate liability in arbitration

Principles established by Tesseract likely to apply more broadly 7 min read

In August 2024, the High Court of Australia overturned the decision of the South Australian Court of Appeal in Tesseract. Please see our updated Insight which analyses the High Court decision and its implications.

Whether proportionate liability regimes found in State and Commonwealth legislation can apply in arbitration has long been a vexed issue. These regimes operate to reduce the liability of a respondent in certain cases on the basis that another concurrent wrongdoer is proportionally responsible for the loss and damage suffered by a plaintiff.

In late October 2022, the South Australian Court of Appeal delivered welcome judicial guidance on this issue in deciding in Tesseract International Pty Ltd v Pascale Construction Pty Ltd [2022] SASCA 107 that proportionate liability provisions do not apply to arbitration, unless there is an express or implied term in the arbitration agreement to the contrary.

The nature of proportionate liability legislative regimes – in particular, the ability for a plaintiff to join third parties to court proceedings, which is not as of right in arbitration – was found to indicate an objective legislative intention that those regimes do not by default apply to arbitration.

As an intermediate appellate court decision, the principles established by Tesseract are likely to apply more broadly across other Australian jurisdictions. The decision is relevant for arbitration participants in all Australian jurisdictions, particularly those who provide or procure services where duties of care may arise and arbitration is used as a dispute resolution method.

Key takeaways

• If arbitration is employed as a dispute resolution method, those who provide or procure services that might give rise to a duty of care should carefully consider whether they wish for proportionate liability regimes to apply. In the absence of express terms (or terms able to be implied) in the arbitration agreement, Tesseract provides a likely default position that the proportionate liability regimes will not apply.
• The application of proportionate liability regimes may be preferable for service providers, to reduce liability to the extent it is contributed to by third parties. However, without also allowing the joinder of third parties, this places additional risk on counterparties which may not be commercially acceptable.
• For those procuring services, if proportionate liability regimes are to apply to arbitration, it should be kept in mind that the joinder of third parties is not as of right in arbitration and multi-party arbitration agreements, which might otherwise allow joinder, are rare. Multiple proceedings may need to be commenced, potentially in separate forums, in order to fully recover loss and damage, if proportionate liability applied to the initial claim is the subject of arbitration.

Facts

The underlying dispute concerned the quality of engineering and consultancy services subcontracted to the applicant (Tesseract) by the respondent (Pascale) in relation to the design and construction of a warehouse by Pascale.

In an arbitration commenced pursuant to a tiered dispute resolution clause, Pascale alleged that Tesseract's work was not performed to the required contractual standard and that it suffered loss and damage as a result. Pascale's claims were led on the bases of breach of contract, negligence and misleading or deceptive conduct.

Tesseract denied any liability. Relevantly, Tesseract argued (among other things) that any damages payable should be reduced because of the proportionate liability of a Mr Penhall, an individual engaged by Pascale to assist with its tender for the design and construction of the warehouse, who Tesseract asserted was a concurrent wrongdoer who owed and breached a duty of care to Pascale.

Tesseract's proportionate liability defence relied on 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). These regimes both operate to limit a defendant's liability having regard to the proportionate responsibility of other wrongdoers.

Pascale argued that the proportionate liability regimes in the Law Reform Act and CCA could not apply in the arbitration. The parties were granted leave to seek determination from the court on the question of law of whether the proportionate liability regimes under the Law Reform Act and CCA applied to the arbitration.

Decision

The court held that:

• the proportionate liability regimes under the Law Reform Act and CCA did not apply to the arbitration in question, and do not apply to arbitrations generally unless there is an express or implied term in the arbitration agreement to the contrary;
• while the Law Reform Act and the CCA form part of the substantive law of South Australia, that alone was not determinative of the question asked of it;
• the parties had impliedly authorised the arbitrator, pursuant to the dispute resolution provisions in their subcontract, to determine their dispute as though it was being determined in a court of law with appropriate jurisdiction. However, this conferral to arbitration was subject to 'such qualifications as relevant statute law may require'; and
• an integral feature of the proportionate liability regimes under the Law Reform Act and the CCA was the contemplation of the joinder of third parties, being an essential aspect of reallocating the risk and burden from the defendant to the plaintiff in certain cases with concurrent wrongdoers. The unavailability of this feature in arbitration is indicative of a qualification to the general implied conferral of power to the arbitrator.

We would be happy to answer any questions you have arising from this Insight, or concerning arbitration or the application of proportionate liability regimes more generally.