Case note: Tesseract International Pty Ltd v Pascale Construction Pty Ltd [2024] HCA 24
Geoff Farnsworth FCIArb
Partner, Holding Redlich
President, Ciarb Australia Branch
Meru Sharma
Lawyer, Holding Redlich
1. Introduction
Tesseract International Pty Ltd v Pascale Construction Pty Ltd [2024] HCA 24 (Tesseract) was an appeal from the decision of the Court of Appeal of South Australia. The proceedings relate to a dispute regarding the provision of services by Tesseract International Pty Ltd (the Claimant before the High Court) for a project owned by Pascale Construction Pty Ltd (the Respondent before the High Court).
The parties were required to arbitrate their dispute and Pascale Construction duly commenced an arbitration. In its defence in the arbitration, Tesseract International denied liability and argued that another party, Mr. Penhall, was partially responsible for Pascale’s losses. So, it argued, any damages payable to Pascale Construction should be reduced based on the contributory negligence and the proportionate liability regime in Part 3 of the Law Reform (Contributory Negligence and Apportionment of Liability) Act 2001 (SA) and/or Part VIA of the Competition and Consumer Act 2010 (Cth).
Pascale Construction argued that the proportionate liability laws did not apply in arbitration because Pascale Construction was not entitled to join any other alleged concurrent wrongdoer to the arbitration who might otherwise be found partially responsible for Pascale Construction’s losses in accordance with those laws. Pascale Construction accepted that it could bring separate proceedings to recover losses from a concurrent wrongdoer but contended that the opportunity for a claimant to recover all its losses in a single proceeding was integral to the proportionate liability laws.
In short, the conundrum in Tesseract was either the finding would burden Pascale Construction by now requiring it to commence court proceedings against Mr Penhall, or it would burden Tesseract International in finding that it could be entirely liable for Pascale Construction’s loss without apportionment to Mr Penhall. To resolve the question of the applicability of the proportionate liability laws, the arbitral Tribunal ordered Tesseract International to apply to the Supreme Court of South Australia, pursuant to section 27J of the Commercial Arbitration Act 2011 (SA), for leave to obtain a determination by the Court of the following question of law:
“Does Part 3 of the Law Reform (Contributory Negligence and Apportionment of Liability) Act 2001 (SA) and Part VIA of the Competition and Consumer Act 2010 (Cth) apply to this commercial arbitration proceeding conducted pursuant to the legislation and the [Arbitration Act]?”
2. First instance decision
The Court of Appeal of the Supreme Court of South Australia granted Tesseract International leave and answered the question of law in the negative. The Court of Appeal found that, while the key operative provisions in the proportionate liability laws would be capable of operating in arbitration proceedings, the arbitral Tribunal was not able to apply the proportionate liability laws to the resolution of the dispute between the parties.
In reaching that conclusion, the Court of Appeal found that both regimes contemplate that a plaintiff will have the opportunity to join all wrongdoers in the one set of proceeding which could not be done in arbitration except by consent. So, the Court of Appeal concluded that the proportionate liability laws were not amenable to arbitration because the Tribunal could not apply the laws except in a manner that would differ materially from the regimes intended by the relevant legislatures.
3. Appeal to the High Court of Australia
Tesseract International appealed to the High Court of Australia. On a practical level, as the High Court acknowledged in oral submissions, the issue in Tesseract would be avoidable if the arbitration agreement specifically noted that the proportionate liability regimes would apply to the arbitration or if Tesseract International had contracted with Mr Penhall on back-to-back terms that included an arbitration agreement or Mr Penhall had simply consented to participate in the arbitration.
Regardless, the enquiry in Tesseract required the High Court to consider whether an arbitral Tribunal could apply the proportionate liability regime. With a 5:2 plurality (involving three separate judgments in the majority), the High Court found that the proportionate liability regimes did apply to commercial arbitration conducted pursuant to the relevant Arbitration Act.
4. The High Court’s decision
Generally, the High Court’s judgments commence by considering whether the proportionate liability regime form part of the law of the dispute, i.e. ‘the law of the land’.[1] Gageler CJ,[2] Gordon and Gleeson JJ (in their combined judgment),[3] and Jagot and Beech-Jones JJ (Jagot & Beech-Jones JJ) (in their combined judgment)[4] found that the regimes were part of the law applicable to the substance of the dispute, being South Australian law. Edelman J,[5] and Steward J[6] (in separate judgments and in dissent) differed fundamentally, finding that the regimes were not part of the law governing the dispute.
As part of the enquiry of considering whether the proportionate liability regimes were part of the law of land, all judgments except Jagot & Beech-Jones JJ’s judgment in Tesseract consider whether the regimes can be applied by an arbitral tribunal in the same manner that the provision can be applied by a court. Gageler CJ found that there was no controversy between the parties that, at least, the key provisions of the regimes can be applied and exercised in arbitration.[7] Gordon and Gleeson JJ considered whether the language of the proportionate liability legislation can be translated or adapted to the arbitration contract without being so altered that they “can no longer be described as part of the substantive laws”.[8] They found that the parties had already agreed that the key provisions can apply in arbitration[9] and found, on their own enquiry, that an arbitral tribunal would be capable of applying the relevant provisions.[10]
For Edelman J, the law of the land does not include the proportional liability regime given that it involves both substantive and procedural rules which could not be adapted so as ‘to be followed by the arbitral tribunal’.[11] Steward J also found that the proportionate liability regime could not be adapted to apply to an arbitration and so should not be applied in an arbitration.[12] Instead, his Honour considered that the courts are the more appropriate forum for dealing with issues of proportionate liability, stating at [267] that “It cannot now be doubted that each regime must have been drafted on the clear assumption that claims for proportionate liability would necessarily be addressed in a court” and stating lastly (and perhaps tellingly) at [283] that “The result in this appeal highlights the limitation of arbitration. The fashionable trumpeting of the arbitral resolution of disputes may have overstated its virtue. Some disputes are better resolved in a court of law”.
Once it was accepted that the proportionate liability regimes were part of the law of the land, the majority found that the regimes did not contravene Article 34. Since the only way a court could review or intervene in an arbitral award is by reference to Article 34, then the only way the arbitrator’s decision could be jurisdictionally incorrect was if it did not comply with Article 34. So, it was necessary for the Court to consider Article 34.[13] For Jagot & Beech-Jones JJ, Article 34 was ‘the only limit’ that was applicable to party autonomy;[14] the grounds under Article 34(2)(b) of arbitrability and public policy trump party autonomy.[15] If an Article 34 ground was not triggered, the Courts must give effect to the autonomy of the parties as is, which meant allowing the selected law to apply to the dispute as is. The joint judgment of Gordon and Gleeson JJ did not disagree with Gageler CJ or Jagot & Beech-Jones JJ’s approach – their Honours found that the parties had already accepted that the grounds under Article 34 are not made out, so its applicability did not need to be considered.[16]
In contrast, the separate dissenting judgments of Edelman J and Steward J do not frame their enquiry by reference to Article 34 (in fact, Edelman J explicitly says that Tesseract is not about Article 34).[17] Instead, Edelman J departs from the Article 34 enquiry by focusing on the arbitral award being ‘final’.[18] At various times, His Honour relies on the award of an arbitral tribunal applying the proportionate liability regime not being ‘final’ as the reason for his view that the regime should not be applied by the tribunal. For example, his Honour suggests at [153] that the reasoning of the plurality is incorrect because it would “detract from a paramount object of arbitration in facilitating final resolution of commercial disputes”. Similarly, he observes at [179] that:
“If some of the laws of that legal system operate in a manner that militates against the paramount object of arbitration to facilitate final resolution of the parties’ disputes, then the natural implication may be that those rules of law would not be included within the scope of the implied choice.”
Additionally, across paragraphs [220]-[223], his Honour focuses on how the finality of the award and the paramount object of the Model Law could only be achieved by non-apportioned liability (solidary liability).
Steward J’s judgment also did not consider Article 34. His Honour found that Article 34 was not relevant, stating at [274] that “Nor is this a case where the parties have contended that their dispute, whether in whole or part, is not capable of being arbitrated, when on public policy grounds or otherwise”. His Honour also found the notion of party autonomy to be ‘largely irrelevant’ to the case.[19]
5. Significance in relation to the principle of ‘minimal’ curial intervention
The judgments in Tesseract show that there is no clear unified approach in the High Court regarding the application of Article 34. For Jagot & Beech-Jones JJ, the primary enquiry before the Court was framed in terms of Article 34(2)(b) and whether the law makes the subject matter non-arbitrable or is against public policy. In contrast, as noted above, Edelman and Steward JJ do not consider Article 34 to be relevant at all.
The judgments also explore (to a greater and lesser extent) how the statutory language in the proportionate liability legislation can be adapted to apply to arbitration and what the appropriate test is when considering adaptability. Whether the ‘law of the land’ can be moulded for arbitration is not a test that appears in Article 34 (or generally, the Model Law or the Arbitration Acts). So, Jagot & Beech-Jones’ judgment does not consider this issue.
If the test is relevant and applicable, it remains unclear what the exact enquiry under the test is — for example, Gageler CJ proposed the test differently than Gordon and Gleeson JJ — or what factors may be considered in adapting the statute for arbitration — for example, is it merely a test of replacing the word ‘court’ with ‘arbitration’ within the statute and seeing if the statute is suitable for arbitration. Edelman J’s judgment and Steward J’s judgment suggest that their Honours consider other factors such as finality of decision, satisfying the object of the statute or satisfying the intention of the drafters of the statute as relevant enquiries falling within the test.
[1] See, e.g. Tesseract International Pty Ltd v Pascale Construction Pty Ltd [2024] HCA 24 (Tesseract) [10], [85], [151] and [231].
[2] Tesseract [12].
[3] Tesseract [138].
[4] Tesseract [293].
[5] Tesseract [210] and [213].
[6] Tesseract [263].
[7] Tesseract [57]-[60].
[8] Tesseract [100], [109].
[9] Tesseract [110].
[10] Tesseract [116].
[11] Tesseract [185].
[12] Tesseract [263].
[13] Tesseract [11].
[14] Tesseract [345].
[15] Tesseract [290].
[16] Tesseract [85], [106]-[107]; [139]-[140].
[17] Tesseract [154]-[156].
[18] Tesseract [218].
[19] Tesseract [274].