High Court clarifies proportionate liability in arbitration … Maybe a little?
On 7 August 2024, the High Court gave judgment in Tesseract International’s appeal against the decision of the South Australian Court of Appeal (Tesseract International v Pascale Construction [2024] HCA 24). Australian arbitration practitioners (including me) have been anxiously waiting for this case to learn what the High Court would say about some important legal principles relevant to arbitral practice.
Decades ago, in Government Insurance Office of New South Wales v Atkinson-Leighton Joint Venture (1981) 146 CLR 206 (‘GIO’), Justice Mason said:
‘The real question, as it seems to me, is whether there is to be implied in the parties’ submission to arbitration a term that the arbitrator is to have authority to give the claimant such relief as would be available to him in a court of law having jurisdiction with respect to the subject matter.’
As the law has developed, the general answer to this seems to have been ‘Yes’.
But in Tesseract, the ultimate question to be answered was whether it is consistent with the principles expressed in GIO (and consistently applied since) for a claimant in arbitration to be able to obtain greater relief than would be available to it in a court of law.
The Court of Appeal said the claimant was entitled to that greater relief. The High Court has now reached the opposite result. Regrettably, the High Court’s reasons did not shed as much light as hoped. While there were five votes for the outcome, there was no clear majority approach.
The five justices in the majority (Gageler CJ in a separate opinion, Gordon and Gleeson JJ jointly, and Jagot and Beech-Jones JJ also jointly) have found that proportionate liability does apply in arbitration (at least in this case). Those five justices reached that conclusion based on three quite different approaches.
The Chief Justice’s approach was the simplest, and following his approach would give clear results in most cases—but (except in one respect) the rest of the Court were not persuaded to follow.
Justices Jagot and Beech-Jones did agree with the Chief Justice that statutory intention is not relevant to the applicability of the substantive law, but only to whether an award would be set aside or not enforced as being in conflict with or contrary to public policy. On substance, however, they simply concluded that it made more sense for the parties to be treated as having agreed to include proportionate liability than to exclude it.
Justices Gordon and Gleeson largely followed the same approach of the Court of Appeal, but reached the opposite conclusion. As a result, they did not see anything contrary to legislative intent in applying proportionate liability within arbitration.
Justice Edelman, in dissent, concluded that the nature of arbitral proceedings was inconsistent with proportionate liability, and the dispute should be decided on the basis of solidary liability, even if that left the respondent substantially worse off. Justice Steward went even further and suggested that not only should proportionate liability not apply in arbitration, but the very existence of a proportionate liability defence might make the whole arbitration agreement ‘inoperative or incapable of being performed’.
Questions for the future
Given the different views of the justices, how should an arbitrator approach the practical question of determining whether particular substantive laws apply in arbitration? If the arbitrator gets it wrong, will that open the award to an enforcement challenge under s 34(2)(b) of the Commercial Arbitration Act?
If an arbitrator does not agree to have a dispute about a question like this resolved by a court as a preliminary question of law, is that itself a failure to afford procedural fairness that would prevent enforcement of the award?
Will proportionate liability apply for arbitrations in Victoria, where the existence of an operative arbitration agreement may prevent a party from being joined to court proceedings (and thus being included in apportionment between wrongdoers)? This issue potentially affects both the parties to the arbitration agreement and the parties to the court proceedings.
What will the insurance industry make of this?