Is Arbitration an Unworkable Form of Alternative Dispute Resolution in Construction Contracts?

Case Summary: Tesseract International Pty Ltd v Pascale Construction Pty Ltd [2022] SASCA

On 21 October 2022, in the decision of Tesseract International Pty Ltd v Pascale Construction Pty Ltd [2022] SASCA 107, the Court of Appeal of the South Australian Supreme Court considered the issue of whether the proportionate liability legislation in South Australia applied to a commercial arbitration proceeding conducted under the Commercial Arbitration Act 2011 (SA) (Arbitration Act). The case is significant because, if the decision is upheld by the High Court, the decision may render arbitration as a dispute resolution process unworkable or unattractive in Australia.

Facts

Tesseract, a company that provided engineering consultancy services, entered into a subcontract with Pascale, a building company, to provide its services in relation to the design and construction of a Bunnings warehouse building.

The Subcontract between the parties contained a process for resolving disputes. In that regard, if a dispute between the parties arose, then either party was required to deliver to the other a notice of dispute. Then, the Subcontract provided a process of conciliation of the dispute between the parties, and, failing resolution, that the dispute would proceed to arbitration before an arbitrator.

A dispute arose between the parties as to the services rendered by Tesseract. Pursuant to the dispute resolution process under the Subcontract, in November 2019 Pascale sent Tesseract a notice of dispute and the dispute was subsequently referred to arbitration under the arbitration clause of the Subcontract.

Pascale alleged that Tesseract’s work was not performed to the standard required under the Subcontract and that Pascale thereby suffered loss and damage. Pascale claimed against Tesseract for negligence, for misleading and deceptive conduct in breach of section 18 of the Australian Consumer Law (ACL) and sought damages. Tesseract denied the claim and, in the alternative, pleaded that any damages payable by it should be reduced by reason of the contributory negligence of Pascale under section 7 of Part 2 of the Law Reform (Contributory Negligence and Apportionment of Liability) Act 2001 (SA) (Law Reform Act). Tesseract also sought to reduce its liability under the proportionate liability provisions of Part 3 of the Law Reform Act^[1] and under the equivalent provisions of the Competition and Consumer Act 2010 (Cth) (CCA) and named an individual as a concurrent wrongdoer.

In reply Pascale denied the applicability of the proportionate liability provisions to the arbitration under the Subcontract.

The arbitrator referred the issue of whether Part 3 of the Law Reform Act and/or the relevant part of the CCA applied to the commercial arbitration proceeding under the Arbitration Act to the South Australian Supreme Court, Court of Appeal.

Decision

In his judgment, Doyle JA covered the history of Part 3 of the Law Reform Act and equivalent legislation in other States of Australia. In summary, the purpose of this legislation was to modify the common law position that ‘any defendant wrongdoer who caused or contributed to the plaintiff’s loss was liable for the entirety of the loss, regardless of whether there were other wrongdoers who also caused or contributed to the loss…’^[2] By comparison, under the proportionate liability regime, ‘the defendant’s liability is limited to its share or proportion of the responsibility for the plaintiff’s loss, leaving it to the plaintiff…to join the other wrongdoer(s) or to separately sue the other wrongdoer(s) and to bear the risk of any shortfall in recovery.’^[3]

The Court held that the proportionate liability provisions of Part 3 of the Law Reform Act and of the CCA did not apply to the arbitration proceeding under the Arbitration Act.^[4]

In arriving at this conclusion, His Honour held that:

1. The Law Reform Act was found to be a substantive law of South Australia which applied to the Subcontract and that the Law Reform Act was not a procedural law^[5];
2. On the particular drafting of Part 3 of the Law Reform Act, Parliament did not intend that the proportionate liability provisions of Part 3 of the Law Reform Act would be ‘picked up’ and applied by the arbitrator under the implied conferral of power on an arbitrator^[6];
3. The proportionate liability regime could not be accommodated in the context of a private arbitration as that regime required that the plaintiff have an opportunity to join 3^rd party wrongdoers to the proceeding.^[7] Arbitration, being a private agreement between parties in a contract or agreement, does not allow for the joinder of parties as the arbitrator has no power to join parties who do not consent to being joined or involved in the arbitration process.^[8] If the arbitration agreement picked up the proportionate liability provisions of the Law Reform Act the plaintiff who obtains an arbitration award against the defendant may find that defendant’s liability reduced. The plaintiff would then need to bring another proceedings against another wrongdoer. Requiring this would ‘inflict an additional burden upon the plaintiff…[including] additional time and expense [and the possibility] of inconsistent findings in subsequent proceedings.’^[9]
4. Sections of the Law Reform Act including sections 8(1) and 8(2) which limit a parties’ liability refer to the ‘court’ making these determinations. Whilst the term ‘court’ is not defined in the Law Reform Act, His Honour held that it did not extend to an arbitrator or arbitral tribunal.^[10] In arriving at this conclusion, His Honour distinguished the Victorian decision of Subway Systems Australia Pty Ltd v Ireland (2014) 46 VR on this issue as that case involved the construction of the Commercial Arbitration Act 2011 (Vic) which was ‘construed by reference to special principles of a model law (the UNCITRAL Model Law on International Commercial Arbitration)’.^[11]
5. Significance was placed on the fact that many State’s proportionate liability provisions may be contracted out of by the parties. This was suggestive that ‘the relevant Parliament 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.’^[12]

Tesseract argued that the parties’ agreement to refer the dispute to arbitration under the Subcontract contained an implied term to the effect that the arbitrator was given jurisdiction to determine the dispute in accordance with the substantive law which would be deployed by a Court of appropriate jurisdiction (Implied Term). His Honour applied the High Court’s test for the implication of terms set out in the BP Refinery (Western Port) Pty Ltd v Shire of Hastings (1977) 180 CLR 266 (BP Refinery conditions). In doing so His Honour found that the Implied Term would ‘ordinarily satisfy the BP Refinery conditions’ but that exceptions must exist.^[13] The exception for the implication of the Implied Term was that the proportionate liability provisions were part of the substantive law of South Australia which, for the reasons set out above, were not ‘amenable to application in arbitration proceedings’.^[14]

High Court Appeal – Watch this space

The decision of the Supreme Court of South Australia, Court of Appeal has been appealed by Tesseract to the High Court of Australia. The matter was heard on 15 November 2023, and judgement was reserved. As at 13 February 2024, no judgement has yet been handed down by the High Court but we await the High Court’s judgment as it has significant implications for the use of arbitration as a form of dispute resolution in Australia.

Take Aways

Care must be exercised in applying this decision as the legislation in respect of proportionate liability in each State and Territory may differ from that in South Australia. There is also the potential for the High Court to modify or reverse the decision of the South Australian, Court of Appeal when it hands down its decision.

If the decision in Tesseract is upheld by the High Court, it may well be that arbitration as a form of dispute resolution in construction contracts and other contexts may become unworkable and unattractive. This is particularly the case to contractors and insurers of participants in the construction industry who may wish to defend claims and, in the alternative, seek to join parties to seek contribution and indemnity under proportionate liability legislation.

If the decision in Tesseract is upheld by the High Court, it may well not be possible for respondents to an arbitration to claim against third parties under proportionate liability legislation and seek their joinder as parties to the arbitration. This would be highly prejudicial to respondent parties in this situation as they would need to defend claims against them and then, in another proceeding, seek to claim against concurrent wrongdoers and others who may be involved in or otherwise responsible for the loss and damage that they are liable for to the other party to the arbitration proceeding. This would be expensive, time consuming and could result in inconsistent outcomes as between the decision in a private arbitration and that determined subsequently by a Court or Tribunal.

The opposite is also true, namely that arbitration as a form of dispute resolution following the decision in Tesseract is now potentially more attractive to Principals and those who wish to sheet home liability to one party such as a head contractor. This is because respondent parties will likely not be able to delay and protract the dispute resolution process by seeking to join parties to a dispute adding to the length and complexity of an arbitration.

Queries

For further information regarding this article, please contact the authors or any member of our Building & Construction team.

Disclaimer

This information and the contents of this publication, current as at the date of publication, is general in nature to offer assistance to Cornwalls’ clients, prospective clients and stakeholders, and is for reference purposes only. It does not constitute legal or financial advice. If you are concerned about any topic covered, we recommend that you seek your own specific legal and financial advice before taking any action.

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[1] These provisions are similar but not identical to other States’ proportionate liability legislation such as part 4 of the Wrongs Act 1958 (Vic).

[2] See Doyle JA at paragraph 15.

[3] See Doyle JA at paragraph 16.

[4] Livesey P and Bleby JA agreed with the judgment of Doyle JA on this issue. See Doyle JA at paragraph 44.

[5] See Doyle JA at paragraph 62.

[6] See Doyle JA at paragraph 45.

[7] See Doyle JA at paragraph 45.

[8] See Doyle JA at paragraph 122.

[9] See Doyle JA at paragraph 196.

[10] See Doyle JA at paragraphs 114 and 115.

[11] See Doyle JA at paragraph 118 citing at [39] to [48] per Maxwell P and [90] to [91] per Beach JA in Subway Systems. In Subway Systems Croft J of the Supreme Court held that VCAT was not a Court for the purposes of section 8 of the Commercial Arbitration Act 2011 (Vic). As such, VCAT was not obliged to refer the dispute to arbitration.

[12] See Doyle JA at paragraph 134.

[13] See Doyle JA at paragraphs 173 and 174.

[14] See Doyle JA at paragraph 186.