Michael Cochrane SC*

Special Counsel MolinoCahill

*(Senior Counsel South Africa)

 

Introduction & summary

Arbitration remains a valuable dispute resolution mechanism.

As the dust settles after the 5:2 majority High Court decision in Tesseract International Pty Ltd v Pascale Construction Pty Ltd 2024 HCA 24 (Tesseract) that proportionate liability laws apply to an arbitration governed by the law of South Australia, several consequences and considerations are drawn into focus. An inability to join third parties to arbitration proceedings without consent and the potential complications arising from such non-joinder are primary considerations.

The majority decision is described in the minority judgments as a departure from the “… the widespread consensus …” of Courts and commentators to the contrary[1] and as highlighting “… the limitations of arbitration …”.[2]  As recorded by the High Court, arbitration bodies and commentators opposed a previous proposal that the proportionate liability legislation be made expressly applicable to arbitrations seated in Australia which was viewed as “a threat to the future of domestic arbitration in Australia”.[3]

In these circumstances, at first glance, Tesseract may appear controversial and may appear to provide a reason to discourage the use of arbitration as a dispute resolution mechanism. This should not be the import of this decision.

Despite any such first impressions and notwithstanding any previous widely held views to the contrary, considering the facts of this matter, in particular the parties’ arbitration agreement and choice of substantive law, and considering the purpose and substance of the proportionate liability legislation, the majority decision is not as controversial as might first appear. The proportionate liability laws are part of the law of South Australia, and non-joinder and separate proceedings are expressly contemplated in their operation, whether applied in court or in arbitration. An inability to join third parties to arbitration proceedings without consent was therefore, according to the majority, no basis to exclude the application of these laws in an arbitration which is subject to the law of South Australia.

Furthermore, Tesseract should not be read as undermining arbitration as a dispute resolution mechanism and should not erode parties’ confidence in arbitration. On the contrary, the decision highlights and thus reinforces the principle of party autonomy as the foundation of Australian arbitration legislation and therefore enhances the value of arbitration as a dispute resolution mechanism.

Any complications now faced by the parties in Tesseract are not the consequence of arbitration as their dispute resolution mechanism but are the consequence of the applicable rules of law and a failure to expressly exclude the application of the proportionate liability laws. Arbitration provides parties, through party autonomy, the opportunity to mitigate, if not completely avoid, complications arising from otherwise applicable laws and procedures and the flexibility to tailor their dispute resolution mechanism to their specific needs.

Background facts

Pascale (claimant) claimed damages from Tesseract (respondent) who denied liability and, in the alternative, raised proportionate liability defences based on the alleged wrongdoing of the claimant’s own consultant (Mr P) who was not party to the arbitration proceedings. Claimant contended that respondent was not entitled to raise these defences in arbitration, in essence contending that by entering a bi-party arbitration agreement the respondent had waived it’s entitlement to raise proportionate liability defences, i.e. defences which relied on the conduct of third parties, because claimant could not join Mr P to the arbitration without consent and “the opportunity for a plaintiff to recover all of its losses in a single proceeding was integral to the proportionate liability laws”. [4]

The proportionate liability laws in Pt3 of the Law Reform (Contributory Negligence and Apportionment of Liability) Act 2001 (SA) (Law Reform Act) and Pt VIA of the Competition and Consumer Act 2010 (Cth) (CCA), (the proportionate liability laws), have no express provisions which make these laws applicable in arbitrations. Similarly, there are no provisions expressly precluding their application in arbitration.

The matter concerned whether the proportionate liability laws were capable of application in arbitration through the operation of s 28 of the Commercial Arbitration Act 2011 (SA) which concerns how the applicable rules of law are determined and affords parties the freedom to choose the rules of law applicable to their arbitrable dispute.

The arbitration agreement in Tesseract did not reflect any express choice of applicable rules of law and did not expressly exclude any rules of law.

However, there was no dispute between the parties that the law applicable to their dispute was, without any express limitation, the law of South Australia. [5] It was also common cause that the proportionate liability laws are part of the law of South Australia; are capable of application in arbitration proceedings;[6] and that the proportionate liability defences were part of the dispute submitted to arbitration.[7]

The majority found that neither the purpose nor the substance of the proportionate liability laws supported the claimant’s stance that these laws were not applicable in arbitration.

The purpose & substance of the proportionate liability laws

The proportionate liability laws departed from the common law principle of solidary liability.[8] Accordingly, the plaintiff’s right to recover its full loss in single proceedings is no longer part of the laws of South Australia.[9] A finding for the claimant would have effectively entailed implying an agreement to be bound by rules which were no longer part of the law of South Australia and finding an implied waiver of defences which are ordinarily available under the chosen system of law.

The principal objective and legislative intent behind the proportionate liability laws was to decrease professional indemnity insurance premiums and protect the viability of that industry,[10] not to provide plaintiffs the capacity to recover all loss in single proceedings or to avoid multiple proceedings.

On a plain reading, these laws do not require the joinder of all alleged wrongdoers to one proceeding. These laws not only contemplate separate proceedings, but they also expressly regulate the subsequent proceedings;[11] provide for the limitation of the liability according to the responsibility of other wrongdoers, including non-parties,[12]  and provide for a “judgment first given” and a “previously recovered judgment.”[13]

The High Court thus found that “The possibility of joinder is not an integral feature of the laws. … the potential application of the proportionate liability laws is no different from their application in court proceedings …”[14] and that non-joinder in arbitration was no basis to preclude the application of these laws.

In essence, non-joinder was a ‘non-issue,’ irrelevant to whether these laws could be applied in arbitration.

Party autonomy

The principle of party autonomy enables parties to choose how their disputes are to be determined. All five judgments recognised party autonomy as the foundation of Australian arbitration legislation and a fundamental principle of arbitration.

Tesseract concerned s 28 of the Commercial Arbitration Act (SA) 2011, which governs the determination of the applicable rules of law and affords parties the freedom to choose those rules of law.

However, the freedom to choose (and exclude) rules of law is but one of the many freedoms foundational to the Australian arbitration legislation. Subject to legislative safeguards, these freedoms include the freedom to agree on: – the number of arbitrators; procedures of appointing and challenging the arbitrator/s; the procedure for the conduct the proceedings; the place of arbitration; the date on which arbitral proceedings commence; language/s to be used; time periods for statements of claim and defence and the elements of such statements; the nature and basis of hearings; the consequences of a party’s default; the appointment of experts by the tribunal; the consolidation of arbitral proceedings; the rules of law applicable to the substance of the dispute; “such other considerations” in accordance with which the arbitral tribunal “must decide the dispute”; “the terms of the contract” in accordance with which “(I)n all cases, the arbitral tribunal must decide the dispute”; the termination of the proceedings; and whether an appeal lies on a question of law.

Confirming the extent of parties’ freedom under s28(1) to choose rules of law the High Court described this freedom as including the ability to “pick and choose between rules of law or sets of rules of law”;[15] “to exclude the application of otherwise relevant substantive laws”; [16] and “to rewrite the law of the land for an arbitration … to modify the law of the land … ”.[17]

Significantly, the arbitral tribunal has a duty under s 28(1) to decide the dispute “in accordance with such rules of law as are chosen by the parties … .”[18]

Despite the freedom to do so, the parties in Tesseract did not expressly exclude the proportionate liability laws from the laws governing their dispute. Non-joinder was no basis to preclude these laws from applying. With the applicable rules of law being, without any express limitation, the law of South Australia and with the proportionate liability laws being part of that system of law, the proportionate liability laws were found to be applicable to the arbitration proceedings.

Conclusion

The result in Tesseract is not the consequence of the parties’ use of arbitration as their dispute resolution mechanism but is the consequence of the applicable rules of law and of not expressly excluding the proportionate liability laws, despite the ability to do so.

Australian arbitration legislation is founded on the principle of party autonomy, which amongst many other freedoms, allows parties to choose the rules of law applicable to the substance of their dispute.

One of the unique benefits of arbitration as a dispute resolution mechanism is the extensive autonomy and flexibility the arbitration legislation affords parties to agree on a range of matters, according to their specific requirements, how their disputes will be determined. As confirmed in Tesseract this can include choosing, excluding or even modifying existing rules of law.

Guided by expert advice, with the appropriate agreement, subject to any legislative restrictions, arbitration enables parties to mitigate, if not completely avoid, not only the potential complications associated with applying proportionate liability laws, but other rules of law, and the ability to agree a range of other aspects about how their disputes will be determined. A range of flexibility and freedoms not ordinarily available to parties in litigation.

Rather than undermining the utility of arbitration, Tesseract highlights party autonomy and reinforces this foundational principle and the value of arbitration as a flexible dispute resolution mechanism.

 

 

[1] At [42] and [226].
[2] At [283].
[3] At [142], [207]-[208], [347]-[352].
[4] At [81].
[5] E.g. at [51].
[6] At [110].
[7] At [134], [288].
[8] At [108].
[9] At [133], [280]-[281].
[10] At [198], [358], [313], [320], [354], [359], [361].
[11] At [127].
[12] S 8(2)(b) Law Reform Act, s 87CD (4) CCA.
[13] S 11 Law Reform Act, s 87CG CCA.
[14] At [128].
[15] At [54].
[16] At [92].
[17] At [374].
[18] S 28(1) and at [87].