The recent High Court decision in Tesseract International v Pascale Construction [2024] HCA 24 has highlighted the importance of proportionate liability and its interplay with arbitration. Here we examine the significant implications for arbitration in the construction and energy sectors.
Tesseract International v Pascale Construction [2024] HCA 24
On 7 August 2024, the High Court in Tesseract International v Pascale Construction [2024] HCA 24 clarified that proportionate liability laws apply to arbitration proceedings.
This means that in arbitration, any damages awarded can be apportioned based on the contributory negligence of third parties – unless that legislation is contracted out of.
The decision also highlights the importance of dispute resolution provisions which enable joinder of relevant parties to an arbitration (or, if principal or head contractor, the importance of having such clauses down the contract chain).
Key takeaways
Parties can rely on proportionate liability unless they explicitly exclude it in their arbitration agreements. This means that unless the parties agree otherwise, liability will be distributed among all responsible parties according to their respective contributions to the harm or loss.
Parties claiming losses for construction work will have a harder time to recover their losses if proportionate liability is not expressly contracted out of. Therefore, parties need to consider the drafting of arbitration agreements and consider whether they wish to allow proportionate liability or otherwise contract out of proportionate liability. For example,
- when drafting from a principal’s perspective, it is now essential to expressly exclude proportionate liability for South Australia, Victoria, and the Northern Territory, as the default position is that it applies to arbitrations.
- whereas, in Victoria, the legislation requires that all concurrent wrongdoers must be party to the proceedings for proportionate liability legislation to apply. Drafters may need to consider how contractors can avoid being solely liable for losses caused by concurrent wrongdoers when a dispute goes to arbitration.
Contracting out of proportionate liability
The below table provides a breakdown of those states which can contract out of proportionate liability.
| State/Territory | Principal | Contractor |
| Legislation permits contracting out of proportionate liability | ||
| New South Wales (Civil Liability Act 2002 (NSW), Part 4) | Include express exclusion of proportionate liability in arbitration clause. | Ensure proportionate liability is not expressly excluded in arbitration clause. |
| Western Australia (Civil Liability Act 2002 (WA), Part 1F) | Include express exclusion of proportionate liability in arbitration clause. | Ensure proportionate liability is not expressly excluded in arbitration clause. |
| Tasmania (Civil Liability Act 2002 (Tas), Part 9A) | Include express exclusion of proportionate liability in arbitration clause. | Ensure proportionate liability is not expressly excluded in arbitration clause. |
| Legislation is silent on whether contracting out of proportionate liability is permitted | ||
| South Australia (Law Reform (Contributory Negligence and Apportionment of Liability) Act 2001 (SA), Part 3) | Include express exclusion of proportionate liability in arbitration clause. | Ensure proportionate liability is not expressly excluded in arbitration clause. |
| Victoria (Wrongs Act 1958 (Vic), Part IVAA) | Include express exclusion of proportionate liability in arbitration clause. | For proportionate liability to apply, all concurrent wrongdoers must be party to the proceedings (s 24AI(3) of the Wrongs Act 1958 (VIC)). For contractors to work around this, they would have to ensure that all other concurrent wrongdoers are included in the arbitration to avoid being solely liable for the damages to the claimant. Drafters may also consider completely removing arbitration from the dispute resolution process, and instead proceeding straight to litigation where the court can compel other parties to join the proceedings, removing the risk for contractors in arbitrations. |
| Northern Territory (Proportionate Liability Act 2005 (NT)) | Include express exclusion of proportionate liability in arbitration clause. | Ensure proportionate liability is not expressly excluded in arbitration clause. |
| Legislation bars contracting out of proportionate liability | ||
| Queensland (Civil Liability Act 2003 (QLD), Part 2) | Principals are unable to expressly exclude proportionate liability in the arbitration clause. | No action is required by the contractor as proportionate liability cannot be excluded in contracts. |
In jurisdictions that restrict opting out of proportionate liability schemes, it is even more critical to ensure that all parties involved in a project (from principal, head contractor, subcontractors and consultants), are all subject to arbitrator clauses which permit joinder of arbitrations – ensuring all parties are bound by findings of fact – including, critically, causation.
Case background
The dispute arose from a contract between Tesseract International Pty Ltd (the appellant) and Pascale Construction Pty Ltd (the respondent) for engineering and consultancy services related to the design and construction of a warehouse. Pascale alleged deficiencies in Tesseract’s work, seeking damages for breach of contract, negligence, and misleading or deceptive conduct under the Australian Consumer Law. Tesseract denied liability and argued that any damages awarded should be reduced to reflect the proportionate liability of a third-party concurrent wrongdoer.
High Court’s analysis
The High Court allowed Tesseract’s appeal finding proportionate liability schemes apply to arbitral proceedings, regardless of the inability to join all alleged concurrent wrongdoers to the arbitration and found the following:
- proportionate liability laws under the Law Reform (Contributory Negligence and Apportionment of Liability) Act 2001 (SA) and the Competition and Consumer Act 2010 (Cth) apply to commercial arbitration proceedings conducted under the Commercial Arbitration Act 2011 (SA).
- the Court distinguished between substantive provisions that limit a defendant’s liability and procedural provisions designed to facilitate the determination of liability. While substantive provisions apply in arbitration, procedural provisions may not, unless replicated in the arbitration agreement.
- the application of proportionate liability laws in arbitration does not contravene public policy or render the subject matter non-arbitrable. This reinforces the principle that arbitration can be used to resolve complex commercial disputes involving statutory rights and liabilities.
Find out more
The decision will have a significant impact across the construction and energy sectors where arbitration is often the preferred dispute resolution regime. If you require construction or infrastructure legal advice, Hamilton Locke can help. We draw on decades of experience to help bring market leading projects to fruition. Find out more, or contact Hamilton Locke Partner Veno Panicker.
