High Court confirms that Australian statutory proportionate liability regimes apply in arbitration

In its recent Tesseract decision, the High Court confirmed that respondent parties are entitled in arbitration to rely upon proportionate liability legislation to reduce their liability commensurate to the extent of their wrongdoing, just as they may do if the matter were determined by an Australian Court.  The key differentiator is that an arbitral tribunal, unlike a court, cannot join a third-party to the arbitral proceedings for the purposes of providing complete relief to a claimant against multiple concurrent wrongdoers.

The High Court’s decision means that parties who foresee disputes against multiple respondents might consider whether arbitration or litigation is the most appropriate forum for resolving multi-party disputes. While the Tesseract decision will likely be welcomed by potential respondents who will now have the same liability exposure in arbitration or litigation, potential claimants should turn their mind to crafting effective multi-party arbitration clauses if arbitration is to remain the preferred dispute resolution mechanism.

Introduction

On 7 August 2024, the High Court of Australia delivered its long-awaited judgment in Tesseract International Pty Ltd v Pascale Construction Pty Ltd [2024] HCA 24 (Tesseract). The High Court determined in a 5/2 majority that proportionate liability legislation applies in arbitral proceedings.^[1] In doing so, the High Court overturned decisions of the South Australian Court of Appeal and the Supreme Court of Western Australia.^[2]

Some parties have previously operated under the assumption that an arbitrator was not entitled to apply the statutory proportionate liability regimes in place around Australia on the basis that those regimes were concomitant with the power to join concurrent wrongdoers to proceedings: because a private arbitrator cannot join a third-party without their consent, that arbitrator also could not apportion liability among concurrent wrongdoers, so the reasoning went.

However, the High Court has now confirmed that an arbitrator’s limited jurisdiction only over the parties before him or her does not mean that a respondent is subject to solidary liability for all concurrent wrongdoers. In this respect, the High Court paid due respect to the arbitrating parties’ choice of substantive law, which is said to include the statutory proportionate liability regime.

While this decision will have little negative impact on potential respondents, it will likely require potential claimants to give careful consideration to their disputes clauses and submission to alternative dispute resolution mechanisms, given:

• A single respondent will be able to avail itself of proportionate liability defences;
• There are serious procedural and practical hurdles to joining concurrent wrongdoers to arbitral proceedings; and
• A claimant may be required to pursue multiple proceedings in multiple fora against concurrent wrongdoers to obtain complete relief. The question of whether an arbitral award against one concurrent wrongdoer has any effect in subsequent proceedings remains unresolved.

Now that the entitlement of respondent parties to rely upon proportionate liability regimes in arbitration has been confirmed, parties who regularly enter agreements which require performance with due care and skill (ie. professionals) may now view arbitration of certain disputes more favourably. There is certainly a case to be made for the increased use of arbitration, particularly given the confidentiality of arbitral proceedings which would be valuable in the professional services context.

Practical impacts and takeaways

The High Court’s decision in Tesseract provides increased certainty as to the relevance of proportionate liability regimes in arbitration conducted under Australian law. While Tesseract concerned a domestic arbitration, there is no reason in principle why an international tribunal applying Australian law could not similarly apply Australian proportionate liability legislation (indeed, it may well be required to do so). With this clarity, parties are better placed to understand and balance the benefits and limitations of choosing an Australian State or Territory law as the governing law of a contract.

Given that an arbitral tribunal may only exercise jurisdiction with respect to the parties to the relevant arbitration agreement, there may still be time and cost efficiencies, as well as other procedural benefits, associated with selecting arbitration compared to court litigation (to which third parties may more easily be joined). However, those benefits might very well be outweighed by the uncertainty and delays which accompany a claimant party having to subsequently pursue third parties to recover their loss if a respondent successfully reduces their liability in arbitration. This is an age-old debate in the context of multi-party arbitration and makes the drafting of disputes clauses crucial.

Accordingly, parties should more actively turn their mind towards:

• Whether the choice of an Australian State or Territory law as governing law is appropriate to ensure complete relief;
• Whether expected multi-party disputes should be litigated or referred to arbitration, and whether there is a mechanism to obtain the consent of multiple respondents to a single arbitration in advance;
• Whether parties might agree to exclude the application of proportionate liability legislation, with a prospective respondent accepting the risk of solidary liability, which the High Court appears to accept is possible.^[3]

What is proportionate liability legislation?

Proportionate liability regimes provide defendants with a defence that reduces their liability to plaintiffs for ‘apportionable claims’ for damages. This is achieved by apportioning responsibility for loss between the defendant and any ‘concurrent wrongdoers’. These regimes exist in all Australian jurisdictions and aim to deal with plaintiffs targeting litigation against a specific deep-pocketed or well insured defendant, relying on the common law principle of ‘solidary liability’.

A unique feature of proportionate liability regimes is that the plaintiff bears the risk of any shortfall in their loss recovery if a single defendant’s liability is reduced. To address that burden, the plaintiff can either:

• Join third party wrongdoers to the existing proceeding against the defendant, so that the proportion of each concurrent wrongdoer’s liability to the plaintiff is determined as part of a single set of proceedings; or
• Separately pursue any concurrent wrongdoers in separate proceedings, either concurrent with or subsequent to determination of the primary proceedings.

However, unlike courts, arbitrators have no power to compel third parties to be joined to arbitrations. This can only occur with the consent of the parties to the existing arbitration and the relevant third party(ies). This is consistent with arbitrations being a confidential, procedurally flexible and party driven alternative dispute resolution process.

Balancing competing policy considerations

The inability of an arbitrator to compel the joinder of third parties was central to the South Australian Court of Appeal’s first instance decision in Tesseract. In Doyle JA’s leading judgment (with whom Livesey P and Bleby JA agreed), his Honour emphasised that a plaintiff’s ability to join third parties and recover the entirety of their loss in one set of proceedings was ‘an integral balance’ necessary to address ‘the reallocation of risk and burden to the plaintiff’ under proportionate liability regimes.^[4]

Similar observations were made in previous decisions where it was suggested that proportionate liability regimes do not apply to arbitrations.^[5] For instance, in Curtin University of Technology v Woods Bagot Pty Ltd [2012] WASC 449, Beech J highlighted that a plaintiff would suffer injustice and hardship by being forced to later pursue third parties in separate proceedings to seek full recovery of their loss, due only to an arbitrator’s inability to join them to an existing arbitration.^[6]

There are also other public policy considerations which support the view that proportionate liability regimes should not apply to arbitrations. This includes avoidance of inconsistent and conflicting judicial determinations being made as to the proportion of liability of concurrent wrongdoers in later proceedings. This is especially so given arbitral awards do not bind or otherwise influence judicial decision-making.

However, a respondent being denied access to substantive rights under the proportionate liability legislation in arbitration is at odds with both the parties’ right to elect the system of law which governs arbitrations between them and the policy reasons which underpin proportionate liability regimes. In Tesseract, the High Court accepted similar submissions made by Tesseract and ACICA (as amicus curiae), and emphasised that the parties’ choice of law in arbitration should always be the priority, irrespective of any hardship a claimant may suffer as a result.