Tesseract International Pty Ltd v Pascale Construction Pty Ltd [2024] HCA 24

What the court decided

Pascale Construction Pty Ltd engaged the appellant as engineering consultant for a Bunnings Warehouse building in South Australia, under a contract providing for arbitration of disputes not resolved by conciliation [285]. Pascale referred a dispute about the standard of the consultant's work to arbitration, claiming damages for breach of contract, negligence and misleading or deceptive conduct under the Australian Consumer Law [78], [79], [80]. The consultant denied liability and alternatively relied on Part 3 for the contract and negligence claims and on Part VIA for the consumer law claim, alleging that a Mr Penhall, who helped Pascale prepare its tender, was responsible for part or all of the loss [80]. As a non-party to the contract, Mr Penhall could not be compelled to join the arbitration [286].

The place of the arbitration is South Australia, and South Australian law governs the substance of the dispute [4]. On the arbitrator's order, the consultant sought leave under section 27J of the Arbitration Act for the Supreme Court to determine whether Part 3 and/or Part VIA apply [82]. The Court of Appeal of the Supreme Court of South Australia gave the consultant leave [82]. That court answered the reserved question of law "No" [7]. It accepted that the liability-limiting provisions could operate in an arbitration, but concluded that, because the regimes contemplate a plaintiff's opportunity to join all wrongdoers and an arbitration allows joinder only by consent, the arbitrator could apply them only in a way materially different from what the legislatures intended [84].

The High Court allowed the appeal with costs and answered the question in the affirmative [76], [141], [385]. Gageler CJ, Gordon and Gleeson JJ and Jagot and Beech-Jones JJ formed the majority [14]. Each majority judgment held that the South Australian law governing the substance of the dispute includes the regimes' provisions limiting a defendant's liability [64], [85], [291]. Each held that the inability to join a concurrent wrongdoer without consent did not prevent those provisions applying [63], [130], [360]. Each held that the regimes did not make the dispute incapable of settlement by arbitration [70], [140], [293], [341].

Gageler CJ held that a rule of procedure in the regimes does not apply through section 28 of the Arbitration Act and applies only if the tribunal replicates it in a procedural order under section 19(2) or the parties agree [34]. His Honour treated the notice provisions (section 10 of the Law Reform Act and section 87CE of the CCA) and the joinder power in section 87CH as rules of procedure outside section 28 [61]. In his Honour's view, the provisions on the effect of a first judgment in later proceedings (section 11 and section 87CG) were also outside it, saying nothing about how the parties' dispute is determined [62]. He also held that arbitrability and public policy arise under section 34(2)(b), not section 28, and go to jurisdiction [9], [47]. In his view, neither regime showed an intention to exclude arbitration, and South Australian public policy gave no reason to treat the dispute as non-arbitrable [71], [75].

Gordon and Gleeson JJ held that section 28 requires the arbitrator to apply the proportionate liability laws with modifications suited to arbitration, unless the modified laws could no longer be described as South Australian substantive law [85]. They held that the possibility of joining other wrongdoers is not integral to the laws, which do not require a plaintiff to sue all wrongdoers in one proceeding [128]. Where Gageler CJ treated the Law Reform Act's notice provision as a rule of procedure, Gordon and Gleeson JJ characterised its core obligation as substantive [61], [121]. A successful defence, they said, would leave the claimant to decide whether to sue other wrongdoers in court [134]. They added that South Australian law does not prevent parties contracting out of the laws in an arbitration clause [131].

Jagot and Beech-Jones JJ held that the only limits on South Australian substantive law applying in the arbitration are party choice, the conflict of laws rules, arbitrability and South Australian public policy [290]. Their Honours agreed with Gageler CJ that sections 10 and 11 of the Law Reform Act and sections 87CE, 87CH and 87CG of the CCA are outside section 28, and characterised all five as procedural rules subject to section 19(1) that can be given effect in an arbitration [364]. Applying the regimes so far as they can apply in the arbitration raised no conflict with public policy [366]. A reasonably clear expression of intention would be needed to modify the law of the land, and a mere agreement to arbitrate was not enough [374], [380].

Edelman J, dissenting, held that the parties had impliedly chosen South Australian law as the substantive law of the arbitration agreement but that the choice did not extend to the proportionate liability schemes [193], [223]. His Honour reasoned that the schemes distribute liability to non-parties, so that an arbitration could only partly resolve the dispute, contrary to a paramount object of arbitration [148], [221], [222]. He also relied on the absence of any choice of the procedural rules inextricably part of the schemes [151], [223]. He described his conclusion, like the majority's, as only a default rule: parties wanting arbitration to resolve their disputes fully will generally be able to do so by expressly excluding proportionate liability laws [153].

Steward J, also dissenting, held that under section 28(3) the arbitrator could not apply the regimes, which without all parties' consent can legitimately be applied only in a court [275]. The defendant's duty to identify other wrongdoers and the plaintiff's capacity to join them, which he regarded as key features, could not be easily or fully applied in the arbitration [263]. Both dissenting Justices would have dismissed the appeal with costs [224], [284].

Why it matters

For a domestic arbitration in South Australia under South Australian law, absent contrary agreement, a party defending an apportionable claim in the arbitration may rely on the provisions of Part 3 and Part VIA that limit its liability, even though a concurrent wrongdoer cannot be joined. To recover the balance of its loss, the claimant must pursue any other wrongdoer separately, usually in court. Parties wanting a claimant to recover its whole loss in arbitration should address the point expressly: Gordon and Gleeson JJ said that South Australian law does not prevent contracting out in an arbitration clause; Jagot and Beech-Jones JJ required a reasonably clear expression of intention; and Edelman J, in dissent, expected an express exclusion generally to secure full resolution. No judgment had to decide whether a particular exclusion clause would be effective.

Numbers in square brackets are paragraph numbers of the judgment. This note summarises a decided case for education and is not legal advice. See how the notes are written.