Tesseract: Proportionate Liability Now Follows You Into Arbitration

Most construction professionals chose arbitration clauses for confidentiality, finality and control. Very few chose them with proportionate liability in mind — because until August 2024, the orthodox view was that apportionment legislation simply didn't operate in arbitration. Tesseract International Pty Ltd v Pascale Construction Pty Ltd [2024] HCA 24 reversed that position. By a 5:2 majority, the High Court held that statutory proportionate liability regimes form part of the substantive law an arbitrator must apply.

The result: in a domestic commercial arbitration, a respondent can now say "the engineer was 40% responsible, and they're not here" — and the claimant may recover only the respondent's share, then have to start fresh court proceedings against everyone else.

The facts

Tesseract, an engineering consultancy, contracted with Pascale Construction to provide engineering services for Pascale's design and construction of a Bunnings warehouse at Windsor Gardens in South Australia. A dispute arose over the quality of Tesseract's work, and Pascale referred it to arbitration under the contract, claiming damages for breach of contract, negligence, and misleading or deceptive conduct under the Australian Consumer Law.

Tesseract denied liability — and pleaded, in the alternative, that any damages should be reduced under the South Australian proportionate liability regime and its Commonwealth counterpart, because a third party who had allegedly assisted Pascale negligently in preparing its tender was a concurrent wrongdoer. That third party was not, and could not be compelled to be, a party to the arbitration.

The question of whether those regimes applied in the arbitration was referred as a preliminary question of law to the South Australian Court of Appeal, which answered no. The High Court granted special leave and answered yes.

The issue

Under s 28 of the uniform (Model Law-based) Commercial Arbitration Acts, an arbitral tribunal must decide the dispute in accordance with the substantive law chosen by the parties — here, the law of South Australia. The question was whether proportionate liability statutes, which speak in the language of "courts" and "proceedings" and assume joinder of concurrent wrongdoers, are part of that substantive law, or whether the impossibility of joining absent wrongdoers in arbitration means the regimes cannot sensibly apply there.

What the High Court held

The majority — Gageler CJ, Gordon and Gleeson JJ jointly, and Jagot and Beech-Jones JJ jointly — held the regimes apply. The references to courts and judicial machinery could be translated to the arbitral setting; Gageler CJ described the exercise as requiring no more than a "modest recasting of statutory language" (at [56]). The inability to join concurrent wrongdoers did not stand in the way: as Gordon and Gleeson JJ put it at [128], "[t]he possibility of joinder is not an integral feature of the laws". Their Honours also noted (at [131]) that a party disadvantaged by apportionment could have contracted out of the regime in the arbitration clause — under South Australian law, nothing prevented that.

In reaching that view, the Court departed from the prior authority practitioners had relied on for the contrary position: Curtin University of Technology v Woods Bagot Pty Ltd [2012] WASC 449 was described by Gordon and Gleeson JJ as wrongly decided (at [130]).

Edelman J and Steward J dissented — Steward J memorably observing that some disputes are better resolved in a court of law. But the default position across Australia's uniform Commercial Arbitration Acts is now set.

What this means in practice

The risk shifted to claimants. Before Tesseract, a principal or contractor arbitrating against its designer could generally expect to recover its whole loss from that respondent, leaving the respondent to seek contribution elsewhere. Now the respondent can apportion blame to absent parties, and the claimant wears the gap: under-recovery in the arbitration, followed by separate court proceedings against the other wrongdoers — with the attendant cost duplication, inconsistent-findings risk, and exposure to their insolvency.

Arbitration clauses need a decision, not a template. The practical responses are state-dependent, which is exactly why this needs attention at contract formation rather than at dispute time:

1. Contract out where permitted. New South Wales, Western Australia and Tasmania expressly permit contracting out of proportionate liability; Queensland expressly prohibits it; South Australia and others are silent. A well-drafted clause for a NSW project can exclude apportionment in arbitration entirely. The same clause on a Queensland project cannot.
2. Consider multi-party arbitration provisions. If apportionment is going to operate, the next-best protection is the ability to bring the concurrent wrongdoers into the same arbitration — consistent arbitration agreements and joinder/consolidation provisions across the head contract, consultancy agreements and major subcontracts.
3. Re-examine existing contracts before disputes crystallise. For live projects with arbitration clauses drafted before August 2024, work out now which regime applies, whether opting out is still possible by agreement, and what the apportionment exposure looks like on your realistic dispute scenarios.

For respondents — typically consultants and contractors — Tesseract is a gift. A proportionate liability defence is now available in the forum where these disputes are actually fought. Identifying credible concurrent wrongdoers early, with evidence rather than assertion, becomes a core part of arbitration defence strategy.

Key takeaways

• Tesseract [2024] HCA 24 holds proportionate liability regimes apply in domestic commercial arbitrations by default (5:2).
• Claimants may recover only the respondent's apportioned share and must pursue absent concurrent wrongdoers separately in court.
• Whether you can contract out depends on the state: NSW, WA and Tasmania allow it; Queensland prohibits it; others are silent.
• Review arbitration clauses across your contract suite now — and align dispute resolution provisions so concurrent wrongdoers can be joined in one forum where opting out isn't available.

This article is general information only and is not legal advice. For advice on a specific contract or dispute, seek legal counsel or contact Sumit Consulting for commercial and claims advisory support.