It is time to revisit dispute resolution clauses: High Court of Australia confirms proportionate liability regimes can be applied in arbitration

If you are in the middle of, or contemplating, a construction or infrastructure project, please take note!

This week, the High Court of Australia threw a spanner in the works for project proponents with arbitration as their chosen dispute resolution procedure.

Proportionate liability legislation exists in all Australian jurisdictions. The regimes provided for by the legislation generally apply to ‘apportionable claims’, meaning certain claims for damages. The general effect of the regimes is to make each defendant who is a concurrent wrongdoer liable to a plaintiff only to the extent of their apportioned share of responsibility. The plaintiff is then left to join or separately sue other wrongdoers and bear the risk of any shortfall in recovery. Where it applies, it displaces the common law position of ‘solidary liability’ where a plaintiff could sue one wrongdoer for the entire loss, leaving them with the risk of pursuing recovery from other wrongdoers.

In 2022, the South Australian Court of Appeal handed down a decision which, consistent with the widespread consensus at the time, held that applicable proportionate liability regimes did not apply to the arbitration on foot as this was not expressly provided for in some form by the parties. This reflected the position that while a plaintiff could join all wrongdoers to a Court proceeding, and obtain a comprehensive liability ruling against all defendants, in an arbitral proceeding this could not be achieved absent agreement by all parties to the joinder of third parties.

This week, the majority of the High Court in Tesseract International Pty Ltd v Pascale Construction Pty Ltd [2024] HCA 24 upended that widespread consensus by overturning the Court of Appeal decision, finding that substantive parts of the applicable proportionate liability legislation did apply to the arbitration in question.

What this means for you

This decision has significant implications for contracting parties at all stages of a project lifecycle.

To illustrate the effect of the decision, say there are significant defects, and an owner pursues arbitration against a contractor seeking damages for losses resulting from a failure to take reasonable care and skill in performing its work. In that arbitration, the contractor may rely on applicable proportionate liability laws to assert, in simple terms, that other parties (say the engineer, a designer, and its subcontractor or supplier) bear some responsibility for the defects with the result that the owner’s damages should be reduced to that extent. Where proportionate liability regimes apply, the Tribunal in that scenario could find that the engineer and other third parties bear some responsibility, and award damages in a reduced amount. That would leave the owner having to pursue separately the other parties for the shortfall. In that separate pursuit, the same result as to liability or the share of responsibility is not assured, as the findings of the Tribunal are not binding on any third party to the arbitration.

The High Court decision therefore heralds a new starting point: proportionate liability applies to arbitration, but, importantly, subject to the proper interpretation of the arbitration agreement. As Edelman J (dissenting) emphasised in a postscript, this decision does not necessarily mean that proportionate liability laws will apply to every arbitration agreement applying the substantive law of an Australian State or Territory. This will always come down to an interpretation of the arbitration agreement, requiring consideration of any express exclusion of proportionate liability legislation and other indications which may confirm an intention to exclude such regimes.

This is instructive for parties currently negotiating contracts, like those common in the construction industry where there are multiple risk interfaces and potentially multiple points of responsibility. This decision brings into sharp focus the importance of carefully considering across the suite of relevant contracts things like:

• (where available) the potential exclusion of the proportionate liability regime;
• the dispute resolution procedure;
• choice of substantive law; and
• (where arbitration is concerned) options around joinder of parties.

These considerations will be particularly important for owners and other parties near the top of the contracting chain to consider as they are the ones who tend to find themselves in the plaintiff position facing the risk of having to pursue multiple parties in multiple processes to recover the full loss.

The decision is not only relevant to drafters and those parties negotiating contracts. For parties with contracts on foot, it will be important to understand whether proportionate liability laws apply to the arbitration agreement, and the implications of that outcome for anticipated or imminent disputes. Understanding the answers may become relevant to how and when disputes are commenced and defended, what claims are pursued, and broader strategy considerations.

Where an arbitration is on foot, there will also be a need to consider the potential for proportionate liability to apply and, if so, its implications for claims being pursued and defended.

Context

These decisions arose from an application for the determination of a single question of law during an arbitration, under s 27J of the Commercial Arbitration Act 2011 (SA) (Commercial Arbitration Act).

The context to that application was that the applicant and respondent had contracted for the applicant to undertake engineering and consultancy services in relation to the design and construction of a warehouse building by the respondent. The respondent alleged that there were deficiencies in the work performed, seeking damages for breach of contract, in negligence and for misleading or deceptive conduct under the Australian Consumer Law. Arbitral proceedings were commenced.

The applicant denied liability and contended in the alternative that any award of damages should be reduced for contributory negligence, and, further or alternatively, to reflect the proportionate liability of a third party concurrent wrongdoer under Part 3 of the Law Reform (Contributory Negligence and Apportionment of Liability) Act 2001 (SA) (Law Reform Act) (in respect of allegations of breach of a contractual or tortious duty of care) and Part VIA of the Competition and Consumer Act 2010 (Cth) (CCA) in respect of the allegations of misleading or deceptive conduct.

In October 2022, Doyle JA, with Livesey P and Bleby JA agreeing, held that the proportionate liability regimes provided for in those parts of the Law Reform Act and the CCA could not be applied in an arbitration unless expressly provided for by an agreement of the parties. The parties had not sought to exclude any proportionate liability laws. Central to this decision was a recognition that, unlike with Court proceedings, in arbitration a third party cannot be joined or have liability determined against it absent their agreement to participate in the arbitration. Our note on this decision of the Court of Appeal can be viewed here.

High Court decision

This week, the High Court overturned the Court of Appeal’s decision. In a 5:2 majority decision, the High Court held that the proportionate liability laws ascertained by reference to the Law Reform Act and the CCA did apply to that arbitration.

While there is a clear majority, there are differences in the reasoning leading to the outcome that proportionate liability regimes did apply. The nuances and reasoning will be important to consider.

Focusing on the judgment of Gageler CJ, the Chief Justice concluded that, due to the operation of s 28 of the Commercial Arbitration Act, the law of South Australia applicable to the substance of the dispute includes provisions of the proportionate liability regimes which limited a defendant’s liability, but does not include those provisions directed towards matters such as giving notice in relation to third party wrongdoers. Gageler CJ then considered whether that conclusion was displaced by either s 34(2)(b)(i) or s 34(2)(b)(ii) of the Commercial Arbitration Act. The two questions which arose were: (i) would an application of the applicable proportionate liability laws render the subject matter of the dispute incapable of settlement by arbitration under the law of South Australia (s 34(2)(b)(i)); and (ii) would an arbitral award applying those laws conflict with the public policy of South Australia (s 34(2)(b)(ii))? Gageler CJ answered both questions in the negative and, in doing so, found the relevant proportionate liability laws to apply to the arbitration.

A common theme running through each majority judgment is that it was within the parties’ power parties to exclude applicable the proportionate liability regimes in their arbitration agreement. They did not do so. But where such laws are not excluded expressly or otherwise on a proper interpretation of the arbitration agreement, the likely upshot will be that the Tribunal is required to give effect to those laws which are part of the substantive law applicable to the dispute and are properly capable of being adapted to arbitration.