A unexpected blow for proportionate liability in SA?

A recent judgment of the South Australia Court of Appeal seems to have crystallised a previously uncertain point in the law of South Australia, and has done so under the radar.

On 21 October 2022, the Court of Appeal in Tesseract International Pty Ltd v Pascale Construction Pty Ltd [2022] SASCA 107 ruled that (except in an unlikely scenario of express party agreement) the proportionate liability regime in Part 3 of the Law Reform (Contributory Negligence and Apportionment of Liability) Act 2001 (SA) would not apply in arbitrations.

This has the obvious effect that a respondent in arbitration may be in a worse position than the same respondent in respect of the same claim conducted in a court. But that is a topic for another day.

The other point that does not seem to have been widely appreciated is that the case effectively clears up a two-decades-old uncertainty about the ability of parties to contract out of the South Australian proportionate liability regime.

Proportionate Liability

Every state in Australia has legislation providing for proportionate liability for certain defendants/respondents in respect of certain types of claims. While they are similar in concept, there are a few different models of legislative wording. The Commonwealth has also adopted proportionate liability in some of its enactments, such as the Competition and Consumer Act 2010, but the Commonwealth’s approach has been to limit apportionment only to claims against other wrongdoers under the same Act. The state regimes apply more generally to ‘negligence’ or duty of care cases, whether arising under common law, contract or statute, making apportionment much more common.

Under the common law, any person (defendant) who contributed to another party’s loss was liable for 100% of that loss, even if others also caused or contributed to the loss, and even if the defendant was only minimally responsible. It was up to the defendant to sue the other wrongdoers to obtain a contribution to the defendant’s payment of damages. The defendant bore the risk that another wrongdoer could not be located or could not pay contribution.

Under proportionate liability, this risk transferred to the other party (plaintiff). The defendant’s liability became limited to its relative responsibility for the plaintiff’s loss. This meant that the plaintiff, if it wished to recover in full would have to pursue all possible wrongdoers, and take the risk that it may not obtain a full recovery of damages.

Contracting Out

There are a number of different proportionate liability models in Australia. Some (NSW, Tasmania, Western Australia) expressly allow parties to agree by contract that proportionate liability will not apply to their dealings. One (Queensland) expressly prohibits contracting out (as a legislative expression of public policy). The other jurisdictions’ legislation is silent, and parties have been left to wonder whether a court would rule that public policy falls in favour of, or against, contracting out.

One consequence of this has been contracts expressly adopting the laws of jurisdictions that allow contracting out.

Another has been the risk that contracting out of legislative safeguards may jeopardise insurance cover as a ‘contractually assumed risk’.

Arbitration

The gist of the recent Tesseract v Pascale decision is that the parties to a contract chose to adopt arbitration as their private method of resolving disputes. Section 28 of the Commercial Arbitration Act 2011 (SA) requires (in effect, in most cases) the arbitrator to apply the law of the jurisdiction—in this case, South Australia. The respondent (Tesseract) sought to rely on proportionate liability. The claimant (Pascale) argued that proportionate liability laws could not be applied within the arbitration context.

The Court of Appeal considered interstate decisions in two cases: Aquagenics Pty Ltd v Break O’Day Council [2019] TASFC 3 and Curtin University of Technology v Woods Bagot Pty Ltd [2012] WASC 449. Both of those cases held that proportionate liability would not apply in arbitrations conducted under the substantive law of those states (Tasmania and Western Australia, respectively), but (notably) both states also already expressly permitted parties to contract out of proportionate liability. This was not such a big step further.

SA’s position

In the recent Tesseract judgment, Doyle JA (with whom the other members agreed), said:

[133] It is suggested that there would be an awkwardness associated with a conclusion that a legislature intended that the same claim or dispute might be determined differently (at least in the first set of proceedings, and subject to any subsequent proceedings involving other wrongdoers) depending upon whether the proceedings are determined by a court or an arbitrator. However, given the essentially private and consensual nature of arbitration proceedings, and the respect for the parties’ autonomy usually associated with those proceedings, I do not attach much weight to this suggested awkwardness. It merely reflects a choice made by the parties.

[134] I would also note in this context that most of the proportionate liability provisions enacted in Australia appear to contemplate that the parties may contract out of those provisions,* suggesting that the relevant Parliaments contemplated that the parties might choose not to subject themselves to proportionate liability even in cases where, if heard in a court, those provisions would ordinarily apply.

*footnote 101: Contracting out is expressly contemplated under the legislation in Tasmania (Civil Liability Act 2002 (Tas), s 3A(3)), Western Australia (Civil Liability Act 2002 (WA), s 4A) and New South Wales (Civil Liability Act 2002 (NSW), s 3A(2)); not precluded in South Australia, Victoria, the Northern Territory and the Australian Capital Territory; and only expressly excluded in Queensland (Civil Liability Act 2003 (Qld), s 7(3)).

(emphasis added)

Accordingly, Doyle JA followed a similar path to Aquagenics and Curtin in holding that proportionate liability did not apply in the arbitration.

The consequences of this are:

• parties can quietly and effectively contract out of proportionate liability in SA simply by requiring disputes to be referred to arbitration; and

• if parties can contract out in that context, they can probably always contract out of proportionate liability by simple agreement.

Parties to commercial contracts will need to consider their options carefully. At the very least, they will need to consider whether an apparently innocuous arbitration clause might have consequences for their insurance cover.