Tesseract International Pty Ltd v Pascale Construction Pty Ltd - Proportionate liability in arbitration

In Tesseract International Pty Ltd v Pascale Construction Pty Ltd [2024] HCA 24, the High Court of Australia decided by a majority (Edelman and Steward JJ dissenting) that the South Australian proportionate liability regime applied to arbitral proceedings. In so deciding, the High Court reversed the decision of the South Australian Court of Appeal, and overturned the approach of both the Supreme Court of Tasmania in Aquagenics Pty Ltd v Break O'Day Council [2010] TASFC 3 and the Supreme Court of Western Australia in Curtin University of Technology v Woods Bagot Pty Ltd [2012] WASC 449.

Background

The appeal that came before the High Court arose out of a construction dispute. The appellant, Tesseract, and the respondent, Pascale, entered into a contract for Tesseract to provide engineering consultancy work in relation to design and construction by Pascale of a Bunnings warehouse in South Australia.

A dispute ensued as to whether Tesseract's work was performed to the standard required under the contract. The parties failed to resolve the matter by way of conciliation process under the contract and the matter was subsequently referred to arbitration.

Tesseract denied liability and, in the alternative, argued that its liability should (on account of the alleged negligence of a third party) be reduced in accordance with the proportionate liability regime established by Part 3 of the Law Reform Act (Contributory Negligence and Apportionment of Liability) Act 2001 (SA) or Part VIA of the Competition and Consumer Act 2010 (Cth) (together referred to as the relevant provisions of the Law Reform Act and Consumer Act).

The arbitrator then referred the following question of law to the South Australian Court of Appeal:

Do the relevant provisions of the Law Reform Act and Consumer Act apply to this commercial arbitration proceeding conducted pursuant to the legislation and the Commercial Arbitration Act 2011 (SA) (CAA)?

The South Australian Court of Appeal answered "no".

High Court decision

As a starting point, the High Court emphasised that party autonomy underpins commercial arbitration. The High Court noted that the UNCITRAL Model Law on International Commercial Arbitration (Model Law), which governs international commercial arbitration conducted under the International Arbitration Act 1974 (Cth), is mirrored in domestic commercial arbitration legislation, including the CAA. Gordon and Gleeson JJ in their joint reasons said (at 87):

"Foundational to the Model Law - and, in turn, to the Arbitration Act - is the principle of party autonomy. One of the clearest expressions of that principle is that the parties to an arbitration agreement are generally free to choose for themselves the law or legal rules applicable to that agreement."

In this context, Gageler CJ identified the different choices given to parties as follows:

• the substantive law that will govern the arbitration (s28 of the CAA);
• the procedural law that will govern the arbitration (s19 of the CAA); and
• the seat or place of arbitration (s20 of the CAA).

Subject to questions of arbitrability and public policy of the law of the seat of the arbitration (in this case South Australia), the majority held that the South Australian proportionate liability regime formed part of the substantive law of that State and applied to the arbitration. Conversely, the question of joinder of parties to an arbitration was a question of procedural law which did not affect the application of the regime. Gageler CJ said (at 63):

"The operation of the central provisions does not depend on all concurrent wrongdoers being parties to one proceeding for a determination to be made as to the proportionate liability of any one concurrent wrongdoer. Nor does their operation as between the parties to a dispute depend on any effect that the resolution of the dispute between those parties might have on third parties."

Gordon and Gleeson JJ in their joint reasons similarly referred to the dichotomy between substantive law and procedural law noting as follows (at 128):

"The proportionate liability laws do not require a plaintiff to sue all wrongdoers in a single proceeding or assume that a plaintiff will wish to or be able to sue all wrongdoers in a single proceeding."

Accordingly, the High Court rejected Pascale's submission that the proportionate liability regime did not apply to an arbitration because of the arbitrator's inability to order joinder of a concurrent wrongdoer.

Takeaways

First, the parties are free to choose separately the substantive law, the procedural law governing the arbitration and the seat of the arbitration.

Secondly, in those state or territory regimes which are silent on excludability (Victoria, South Australia, the Australian Capital Territory and Northern Territory), it appears that the parties are free to exclude proportionate liability from the arbitral process. Gordon and Gleeson JJ said (at 131):

"To the extent that a plaintiff would be disadvantaged by s 11, South Australian law does not prevent a party from contracting out the proportionate liability laws in any arbitration clause."

However, the Queensland regime expressly prohibits exclusion. Where Queensland is the seat of the arbitration attempting to exclude the regime would be problematic.

Thirdly, Tesseract raises some important questions for parties to consider when negotiating dispute resolution clauses, especially where the nature of the transaction is likely to result in multi-party disputes. These include:

• whether arbitration or litigation should be selected as the dispute resolution mechanism in the contract (noting that an applicant in an arbitration which does not exclude the proportionate liability regime may need to commence litigation against other alleged wrongdoers following the outcome of the arbitration);
• whether to exclude the proportionate liability regime from arbitration under the contract (in jurisdictions where this is possible). If proportionate liability is not excluded, and the concurrent wrongdoer is not joined to the arbitration. there is a real risk of an arbitral award (that finds a respondent proportionally liable) being inconsistent with a subsequent determination (in a proceeding by the applicant against the other alleged wrongdoers). If that was to eventuate, the opportunity for the innocent party to fully recover from all wrongdoers could be lost; and
• whether all relevant contracts for the project can be drafted to provide for all potential parties to a dispute to be joined in the same arbitration.

Norton Rose Fulbright has one of the most dynamic dispute resolution practices in Australia and globally. We have strong expertise in construction project delivery issues and disputes, including litigation and alternative dispute resolution (ADR). Please contact us if you require advice on dispute resolution mechanisms or assistance with drafting on future projects.

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