Tesseract v Pascale - Proportionate liability in arbitration

Shifting risk to the claimant 4 min read

The High Court's recent judgment in Tesseract International Pty Ltd v Pascale Construction Pty Ltd has significant implications for parties subject to existing arbitration agreements and that are considering it as a mode of dispute resolution in future contracts.

In this Insight, we analyse the decision and its effects.

Key takeaways

• Proportionate liability schemes are likely to apply to arbitration proceedings.
• Claimants (eg principals under construction contracts) are now likely to face greater difficulties recovering the entirety of their losses through arbitral proceedings, in circumstances where proportionate liability regimes cannot be (or have not been) expressly contracted out of.
• Parties negotiating dispute resolution clauses will need to carefully consider whether to expressly exclude proportionate liability schemes, and whether the jurisdiction governing the contract permits this.
• Commercial parties may now wish to review all contracts containing arbitration agreements and assess whether their risk profile changes as a result of this decision.

Background

On 7 August 2024, the High Court handed down judgment in Tesseract International Pty Ltd v Pascale Construction Pty Ltd [2024] HCA 24. In a previous Insight, we considered the South Australian Court of Appeal decision that held proportionate liability legislation did not apply to arbitral proceedings. The High Court has overturned that decision—it does apply to arbitral proceedings, notwithstanding the fact that claimants are (typically) unable to join all alleged concurrent wrongdoers to the arbitration.

Proportionate liability regimes

Each Australian jurisdiction has enacted proportionate liability legislation that impacts how plaintiffs are able to recover losses arising from apportionable claims. Such claims include those for economic loss or damage to property that arise from a failure to take reasonable care (whether in contract, tort, statute or otherwise), and claims for damages under the Australian Consumer Law (the ACL).

In circumstances where multiple wrongdoers are the cause of a plaintiff's loss for an apportionable claim, proportionate liability regimes act to reduce a defendant's liability, to a percentage reflecting the extent of their responsibility for that loss or damage. As a result, plaintiffs will generally be required to join all concurrent wrongdoers to proceedings to recover their full quantum of loss.

Australian jurisdictions have taken differing approaches to the question of whether parties can contract out of proportionate liability regimes. In Queensland, the relevant Act expressly prohibits it; legislation in New South Wales, Tasmania and Western Australia allows parties to do so. In other jurisdictions, the position is not expressly set out.

Tesseract v Pascale

The parties' submissions

Tesseract sought to appeal the South Australian Court of Appeal's decision in Tesseract International Pty Ltd v Pascale Construction Pty Ltd [2022] SASCA 107, which found that the proportionate liability regimes in Part 3 of the Law Reform (Contributory Negligence and Apportionment of Liability) Act 2001 (SA) and Part VIA of the CCA did not apply to an arbitration between the parties.

Tesseract submitted that the South Australian Court of Appeal erred in finding the relevant proportionate liability schemes were not capable of being modified to apply in arbitral proceedings, just as they are in judicial proceedings.

In contrast, Pascale argued that proportionate liability schemes were not capable of being applied in arbitral proceedings because:

• they could not be moulded or amended, only omitted or partially applied; and
• this would undermine the commerciality of the parties' decision to use arbitration as the method of dispute resolution.

The High Court decision

In a 5:2 split decision, with five separate judgments, the High Court allowed Tesseract's appeal. It ruled that, by default, proportionate liability schemes apply to arbitral proceedings, notwithstanding the inability to join all alleged concurrent wrongdoers to the arbitration.

The majority's judgments emphasised that:

• The parties' choice of law was of utmost importance and should be respected.
• The relevant proportionate liability schemes formed part of the law applicable to the substance of the dispute on the basis of that choice.
• On their proper construction, those schemes were not themselves 'incapable of settlement by arbitration.' Rather, the laws were found capable of application in arbitration, with modifications such that they could still be described as the substantive laws of South Australia; and the inability to compel the joinder of all wrongdoers in one proceeding was not an integral feature of them.

To the extent that a plaintiff would be disadvantaged by the inability to join concurrent wrongdoers, this was nullified by the fact that the provisions in the South Australian legislation and the CCA addressing proportionate liability did not prevent the parties from contracting out of them.

The dissenting judgments of Justices Edelman and Steward considered that this approach was inconsistent with the object of arbitration: being the fair and final resolution of commercial disputes without unnecessary delay or expense.

The implications

• It is generally the case that third-party concurrent wrongdoers cannot be joined to the arbitral proceedings. In these circumstances, parties to contracts on foot containing arbitration agreements that do not expressly exclude proportionate liability laws (or where doing so is prohibited) are now likely to face a scenario where any future disputes in relation to apportionable claims cannot be finally determined at arbitration.
• To recover the full measure of loss, claimants in this scenario will now likely be required to commence court proceedings to recover from any concurrent wrongdoers.
• The joinder of third parties is not as of right in arbitration, and multi-party arbitration agreements, which might otherwise allow joinder, are rare. Where the initial claim is the subject of arbitration, proceedings may need to be commenced, potentially in separate forums and with a risk of inconsistent findings, in order to fully recover loss and damage.
• With contracts yet to be concluded, particularly those likely to involve subcontractors or that interface with other projects or contracts, parties should ensure that any decision to have recourse to arbitration adequately considers the allocation of risk associated with recovering loss from concurrent wrongdoers.
• Those negotiating contracts in jurisdictions that do not permit the contracting out of proportionate liability schemes will need to reconsider their choice of governing law, and/or consider creative multi-party or multi-contract arbitration agreements to ensure recovery from all potential wrongdoers through arbitration.