The issue of whether the proportionate liability provision of the Civil Liability Act 2002 (WA) (CLA) apply to arbitrations has recently been considered by the Western Australian Supreme Court in Curtin University of Technology v Woods Bagot Pty Ltd  WASC 449.
The proportionate liability provisions in the CLA apply to claims for damage to property or pure economic loss when there are multiple persons who have each caused or contributed to the same loss.
The provisions restrict the amount of damages that a plaintiff can recover from a particular defendant to that defendant’s proportionate share of responsibility for that loss. The proportionate liability provisions displace the common law rule that allow a plaintiff to recover all of its loss from a particular defendant, who then must pursue the other defendants for contribution.
In the Curtin University decision, the Western Australian Supreme Court held that the proportionate liability provisions of the CLA do not, as a matter of legislative force, apply to commercial arbitrations.
The court left open the possibility, however, that the proportionate liability provisions may be expressly or impliedly adopted by the parties in their arbitration agreement.
The decision has serious implications for energy companies and serves as a reminder of the importance of dealing with the issue of proportionate liability in arbitration agreements.
Operation of proportionate liability provisions
The proportionate liability provisions of the CLA are contained in Part 1F.
The provisions relevantly provide:
- in any proceedings involving an ‘apportionable claim’ the liability of a defendant who is a ‘concurrent wrongdoer’ in relation to that claim is limited to an amount reflecting that proportion of the damage or loss claimed that the court considers just having regard to the extent of the defendant's responsibility for the damage or loss (s 5AK),
- apportionable claim’ includes a claim for economic loss or damage to property in an action for damages (whether in contract, tort or otherwise) arising from a failure to take reasonable care (s 5AI),
- a ‘concurrent wrongdoer’ is a person who is one of two or more persons whose act or omission caused, independently of each other or jointly, the damage or loss that is the subject of the claim (s 5AI),
- a defendant against whom judgment is given under the proportionate liability provisions cannot be required to contribute to the damages recovered from another concurrent wrongdoer (s 5AL),
- the court may give leave for any one or more persons to be joined as defendants in proceedings involving an apportionable claim (s 5AN), and
- parties may contract out of the proportionate liability provisions (s 4A).
Similar provisions apply in equivalent legislation in the other Australian states and territories.
The provisions have the effect of limiting the amount of damages that a plaintiff can recover from one defendant when there are multiple defendants who have caused the same loss. The provisions mark a departure from the common law, where a plaintiff could recover damages for its entire loss against one of those defendants, even though that defendant was only partially at fault for the damage caused.
For example, suppose a building collapses due to a combination of poor design, poor construction and the use of faulty materials. Suppose that the design engineer is 25% liable for the collapse, the builder 35% liable and the manufacturer 40% liable.
If the plaintiff chooses only to sue the engineer (because, for example, the engineer is insured but the builder and manufacturer are in financial trouble), under the proportionate liability provisions the plaintiff is limited to recovering damages for only 25% of its loss.
This can be contrasted against the common law position, where 100% of the loss could be recovered from the engineer, who would then need to pursue the builder and manufacturer for contribution.
Rationale for proportionate liability provisions
The proportionate liability provisions in the CLA and similar provisions in other states and territories were introduced in response to the growing number of actions against professionals, particularly auditors, in negligence.
These professionals were being targeted by plaintiffs not because of their culpability (which might be small) but because they were insured and had the capacity to pay large damages awards. One consequence of this was that insurance premiums for professionals were rising sharply.
The proportionate liability provisions were designed to reduce the amount of damages payable by each defendant to an amount that properly represents its degree of fault.
Facts in the Curtin University decision
The Curtin University decision concerned a dispute between Curtin University and Woods Bagot in respect of a construction contract entered between them.
Curtin University commenced arbitration against Woods Bagot under the Commercial Arbitration Act 1985 (WA) (CAA).
In its points of defence, Woods Bagot invoked the proportionate liability provisions of the CLA, contending that there were concurrent wrongdoers responsible for the losses of which Curtin University complained.
Curtin University denied that the proportionate liability provisions of the CLA applied to the arbitration.
The arbitrator referred to the Supreme Court the question of whether the proportionate liability provisions of the CLA apply, by legislative force, to commercial arbitrations pursuant to the CAA.
Decision of the Supreme Court
The Supreme Court held that the proportionate liability provisions of the CLA do not apply by legislative force to arbitrations under the CAA.
The reason that the court reached this conclusion was:
- The proportionate liability provisions use terms like ‘court’, ‘action for damages’ and ‘judgment’. These terms refer to court proceedings, not arbitrations. The natural and ordinary meaning of the language used in the provisions therefore does not comfortably encompass arbitrations.
- The court’s ability to join concurrent wrongdoers to proceedings is an integral part of the proportionate liability regime. In the absence of such a power, the regime may cause hardship or injustice to the plaintiff. Arbitrators do not, however, have power to join parties to an arbitration unless those parties have consented. If the proportionate liability regime were to apply to arbitrations, a plaintiff might need to pursue some defendants in arbitration and others through the courts. The courts would not be bound by the arbitrator’s finding, with the consequence that conflicting judgments may arise.
- The provision in the CAA which says that questions arising in an arbitration will be determined ‘according to law’ means according to the common law, not statute.
- Parliament made express reference to arbitration in the Law Reform (Contributory Negligence and Tortfeasors’ Contribution) Act 1947 (1947 Act), a statute whose subject matter overlaps with the CLA. It might be expected that if Parliament had intended the CLA to apply to arbitrations, it would have made explicit reference to arbitrations as it did in the 1947 Act.
The court expressly left open the possibility, however, that an arbitration agreement may expressly or impliedly incorporate the proportionate liability regime into an arbitration.
Whether the proportionate liability regime is expressly or impliedly invoked by the arbitration agreement will depend on the proper construction of the contract. In the present case, the court did not need to consider the issue because it went beyond the question that was referred by the arbitrator.
Implications for energy companies
The decision has serious implications for the energy industry.
Although the decision is limited to an analysis of the Western Australian proportionate liability provisions, similar considerations are likely to apply to the proportionate liability regimes of other states and territories.
Many energy companies have agreements with suppliers, contractors and customers which provide that disputes must be referred to arbitration. Many of these agreements also deal expressly with the issue of proportionate liability, but some do not.
The Curtin University decision creates uncertainty about the circumstances in which proportionate liability will apply in arbitrations. Although proportionate liability will not apply by reason of legislative force, it may be impliedly incorporated into the arbitration agreement. The circumstances in which such a term will be implied remain unclear.
The existence or absence of proportionate liability can have a huge effect on the amount of damages that energy companies may recover, or be liable for, in respect of arbitral claims for damage to property or pure economic loss. The existence of a proportionate liability regime may restrict the damages an energy company can recover from a contractor where damage to the company’s property is caused both by the contractor and the faulty materials it has used. Conversely, the absence of a proportionate liability regime may mean that the company is liable to a customer for all losses associated with an interrupted energy supply, even though the company is only partially at fault.
The lesson of the Curtin University decision is that energy companies should include in their arbitration agreements an express term dealing with whether the relevant proportionate liability provisions apply to arbitrations under the agreement. Whether the provisions ought to apply will depend on weighing of the likely benefits that proportionate liability brings in defending damages claims against the restrictions it imposes in recovering damages from counterparties.