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Arbitration is often used to resolve commercial disputes, especially within the construction industry. It’s typically time and cost-saving when compared to resolving a dispute through the courts but there are certain procedural differences that may put certain parties at a disadvantage – one of these differences is the issue of proportionate liability.

At present, proportionate liability is often applied in the context of proceedings heard by a State or Federal Court, that is a case heard before a Judge in open Court. Whereas, if a party is contracted to, or elects to, partake in a private alterative dispute resolution process, known as arbitration, which a neutral third party is appointed to render a binding decision, the law is currently uncertain about whether a party may rely on the principles of proportionate liability.

Proportionate liability in court

In a Courtroom, a judge can apportion legal responsibility between concurrent wrongdoers, who have caused a plaintiff loss and damage. If the proportionate liability regime applies, the loss suffered by the plaintiff will be apportioned between all the concurrent wrongdoers, according to their respective responsibility of the loss. This therefore means that if a defendant can successfully point to a concurrent wrongdoer, whose conduct also caused the plaintiff loss and damage, the defendant can reduce its liability to the claim.

Arbitration and proportionate liability

The proportionate liability regimes introduced in each State and the Commonwealth are currently unclear on whether proportionate liability could be applied in the context of arbitration. The primary reason being, that the legislation does not specifically define the term Court or Tribunal to include an arbitration.

In circumstances where parties may be contracted to engage in an arbitration, this can be a disadvantage to the respondent, in circumstances where they consider a concurrent wrongdoer should be liable for the claim against it.

Court to decide role of proportionate liability in commercial arbitration

On 19 May 2023, the High Court of Australia granted Tesseract, advised by Andrew McAdam and Amelia Santilli from Macpherson Kelley, special leave to appeal a decision of the South Australian Court of Appeal, which initially held that proportionate liability is not applicable to arbitrations.

The Federal and State jurisdictions each have legislation which, in short, provides that where a defendant or respondent has failed to exercise reasonable care (or has engaged in misleading and deceptive conduct) and this has resulted in economic loss, they may be only liable for a proportion of the loss. The proportion of the liability is determined by balancing the responsibility of concurrent wrongdoers and allocating the split of liability appropriately.

Tesseract is the respondent in an arbitration being conducted in South Australia which relates to a construction dispute about the design of a Bunnings Warehouse in Adelaide. Tesseract contends that the proportionate liability legislation in South Australia and under the Commonwealth’s Australian Consumer Law applies to the arbitration and therefore limits its potential liability to a proportion of the loss claimed by the applicant.

What impact will this have on the arbitration process?

Special leave is granted in only a few applications, so the fact that the High Court granted special leave in this instance is a testament to the application put forth by the MK team.

If the appeal is successful, the result will be significant. Arbitrations occur frequently in commercial dispute resolution, most notably in the construction industry where arbitration is often mandated by the parties’ contractual arrangements. The High Court may hold that a respondent to an arbitration (to which proportionate liability applies) is liable for only a proportion of the applicant’s loss. Such proportion is assessed by reference to the responsibility of other wrongdoers who are not parties to the arbitration, noting that arbitration is by design a two-party process. This would be a fundamental change and a great result for our client if allowed..

Contact our Litigation team for expert advice

If any of this raises questions for you, don’t hesitate to contact our Litigation team who have specialised experience in the construction industry and with alternative dispute resolution.

The information contained in this article is general in nature and cannot be relied on as legal advice nor does it create an engagement. Please contact one of our lawyers listed above for advice about your specific situation.