Case by Case: Part 1 – Lessons from Tesseract

As the construction landscape evolves, landmark court decisions serve as pivotal points, influencing everything from contract disputes to industry regulations. This series will delve into some of the landmark cases of 2024, examining the influence and implications they have had on the construction industry.

This week, we explore the case of Tesseract International Pty Ltd v Pascale Construction Pty Ltd [2024] HCA 24 (Tesseract), in which the High Court handed down a significant judgement in finding that the proportionate liability laws do apply to arbitrations.

1. Background

This case involved a contract between Tesseract and Pascale for the provision of engineering consultancy work, in connection with the development of a Bunnings Warehouse

A dispute regarding the standard of Tesseract’s work arose and was referred for arbitration, with Pascale claiming damages for breach of contract, negligence, and various claims under the Australian Consumer Law.

Tesseract denied liability or alternatively argued (amongst other things) that a third part concurrent wrongdoer was responsible for part (or all) of the losses claimed by Pascale and the damages payable should be reduced pursuant to the relevant proportionate liability legislation.

Pascale denied that the statutory proportionate liability regime applied to the arbitration (as the alleged concurrent wrongdoer was not a party to the contract and a third party could not be joined to an arbitration without consent).

2. What is proportionate liability

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 the extent that there are other concurrent wrongdoers that caused the plaintiff’s loss. That is, a defendant is only liable for a percentage representing the extent of their responsibility for the loss.

Each state and territory in Australia have its own proportionate liability scheme, with differing approaches to the question of whether a party can contract out of proportionate liability. In Queensland, the relevant act expressly excludes it.

The applicability of this regime in arbitrations has been a long-contested issue. Unlike courts, arbitrators lack authority to compel third parties to partake in arbitrations (except by consent of all parties). Because of the inability to join third parties, and because the proportionate liability laws contemplate the possibility for joinder of all parties in one proceeding, it has been the practice that proportionate liability does not apply to arbitrations.

3. The Decision

Tesseract submitted that the South Australian Court of Appeal erroneously found the relevant proportionate liability schemes were not capable of being modified to apply in arbitral proceedings, unlike their application in judicial proceedings.

In contrast, Pascale argued that these schemes were not capable of being applied in arbitral proceedings for two key reasons:

1. they could not be modified or amended, only entirely excluded or applied in part; and
2. allowing their application would compromise the fundamental commercial rationale behind the parties’ choice to resolve disputes through arbitration.

In a 5:2 split decision, the High Court held that the proportionate liability laws could indeed be applied in arbitration, notwithstanding the inability to join all alleged concurrent wrongdoers in the proceedings. The Court stated:

1. At [185] – If the proportionate liability laws form part of the law that is applicable to the substance of the particular jurisdiction, it follows that the proportionate liability laws are capable of application by the arbitrator with such modifications as to take account of characteristics which distinguish an arbitration from court proceedings such that the laws can still be described as the substantive laws of that jurisdiction.
2. At [130] – The absence of a right of joinder in an arbitration does not affect the application of the limitation of liability rule and to the extent the Supreme Court of Western Australia decided differently in Curtin University of Technology v Woods Bagot Pty Ltd [2012] WASC 449 (at [85]), that case was wrongly decided.

• At [131] – To the extent that a plaintiff would be disadvantaged by section 11 of the Law Reform Act (which applies if a plaintiff brings a separate action against a wrongdoer who is entitled to a limitation of liability under Part 3 of the Law Reform Act), South Australian law does not prevent a party from contracting out of the proportionate liability laws in any arbitration clause.

1. At [134] – The mere fact of an arbitration agreement between two parties does not demonstrate that the parties contracted out of the application of the proportionate liability laws to the resolution of their dispute.

In coming to this decision, the High Court has overturned decisions of other courts in the country.

4. Implications of decision

This decision presents a notable advantage for respondents, as it allows for the potential reduction of their liability to claimants in arbitration when concurrent wrongdoers can be identified. Consequently, the responsibility and risk of seeking contributions from these wrongdoers now falls to the claimants. This shift may lead to uncertainty and delays as claimants attempt to pursue third parties to recover losses, particularly after a respondent successfully reduces their liability during arbitration.

To recover their full losses, claimants will need to either:

1. Initiate court proceedings against any concurrent wrongdoers; or
2. Join the third party in the arbitration, contingent upon obtaining consent from both the third party and all parties involved in the arbitration.

If claimants choose to pursue separate proceedings against concurrent wrongdoers while arbitration is ongoing, they risk encountering inconsistent findings between the two processes. Perhaps most significantly, this decision could result in inadequate compensation for claimants if concurrent wrongdoers are insolvent or unable to fulfill their financial obligations.

Parties and practitioners should consider the following implications of this decision:

1. When opting for arbitration, evaluate the suitability of the governing law and the relevant proportionate liability scheme in the applicable State or Territory.

1. Ensure that arbitration is necessary when multiple parties may be involved in the same dispute. If arbitration is unavoidable, explore options for obtaining prior consent from all respondents to participate in a single arbitration.
2. Determine whether, under the relevant State or Territory laws, parties can agree to exclude the application of proportionate liability legislation.

Legal Support

At Lamont Project and Construction Lawyers, we bring extensive experience to all phases of a project – from development and contract negotiation to ongoing support, dispute avoidance, and practical completion.

Our tailored approach ensures that clients are optimally positioned for success, no matter the circumstances they face.

If you have questions about your current or future projects, please feel free to reach out to us. We would be happy to discuss how we can assist you.

Contact: Peter Lamont or Stephanie Purser

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