High Court decision shifts risk onto arbitration claimants

This decision puts Australian businesses on notice that particular care ought to be given to whether arbitration clauses suit their circumstances, and that they ought to review their dispute resolution clauses to assess the impact of the decision on their contracts.

Key takeaways from the case:

• Relevant proportionate liability schemes will apply in arbitration unless the parties have contracted out of the regimes and the jurisdiction governing the agreement allows the parties to contract out of the scheme.
• In certain circumstances, claimants in arbitration proceedings will not be able to recover all losses from the respondent, as:
  1. respondents are able to deploy a proportionate liability defence; and
  2. there are significant hurdles to joining concurrent wrongdoers to arbitrations.
• Claimants may have to pursue separate proceedings against concurrent wrongdoers to recover all their losses.
• Parties should review their dispute resolution clauses.
• Contracts governed by the law in certain jurisdictions that prohibit contracting out of proportionate liability regimes (such as Queensland) require further attention.

Proportionate Liability

Proportionate liability regimes operate to reduce the liability of a wrongdoer who has caused loss together with another wrongdoer. The defence reduces a defendant’s liability to the proportion to which the defendant was at fault. A practical effect of the regime is that a plaintiff must sue all wrongdoers in order to recover its total loss.

Importantly, each Australian State has a different statutory framework that governs proportionate liability. The regimes in New South Wales, Tasmania and Western Australia allow parties to contract out of the regimes; Queensland expressly prohibits it; and the remaining jurisdictions are silent on the issue.

The Decision

The case related to claims by Pascale Construction Pty Ltd (the applicant) for breach of contract and negligence by Tesseract International Pty Ltd (the respondent) which were referred to arbitration. In its defence, Tesseract denied liability, and, in the alternative, argued that a third-party concurrent wrongdoer was responsible for the losses claimed by Pascale and that damages should be reduced in accordance with the proportionate liability regime established by South Australian statute.

As the relevant third-party wrongdoer was not a party to the contract, it could not be joined to the arbitral proceeding without the consent of all three parties.

On appeal from the South Australian Court of Appeal (which found that the South Australian proportionate liability regimes did not apply to arbitrations), the High Court held that proportionate liability legislation does apply to arbitral proceedings unless, where allowed, the contract between the parties expressly excludes the applicable proportionate liability regime.

Lessons and Implications

This decision:

• allows respondents to limit their liability in arbitration and block the participation of third-party wrongdoers; and
• compels claimants to separately sue concurrent wrongdoers in court to fully recover their losses, with the risk of inconsistent findings of fact.

Consequently, care ought to be taken when negotiating arbitration clauses to assess these risks, depending on whether one is likely to be a claimant or a respondent. Potential claimants would seek to exclude any applicable proportionate liability regime (in applicable jurisdictions), whereas potential respondents would seek to have such regimes apply. Whatever the case, businesses would do well to review their standard form dispute resolution clauses and obtain advice about their individual circumstances.

Without strategic drafting for the circumstances, this decision can have significant and detrimental impacts for either party should a dispute arise.

If you have any questions about proportionate liability regimes and how they might apply to your business in the event of a dispute, contact the Addisons Commercial Litigation team.