Will proportionate liability legislation apply to arbitrations? Not in Western Australia and probably not in any other jurisdiction in Australia.

Whether proportionate liability applies to arbitration has been a vexed issue for the construction industry for some time.

The Western Australia Supreme Court1 has recently determined that the proportionate liability regime does not apply to arbitration. However, it is still open to an arbitrator to apply proportionate liability if the arbitrator determines that the parties agreed (expressly or by implication) in the arbitration agreement that proportionate liability is to be adopted in the arbitration. In practice, the existence of such a term is unlikely.

Key practical outcomes of this case:

  1. 1.Arbitration might be used to effectively contract out of proportionate liability provisions even though contracting out is not permitted in some Australian jurisdictions, such as Queensland.
  2. Parties may, in their arbitration agreements (contained in the construction contract or consultancy agreement) put the proportionate liability/arbitration matter to rest by expressly providing that the proportionate liability regime should not be taken into account by the arbitrator.

Proportionate Liability vs. Joint and Several Liability

The ordinary rule (“Joint and Several Liability”) is that a plaintiff can sue a defendant for all the loss it suffered if that defendant contributed to the loss. For example, even though the defendant may only be responsible for 30 per cent of the plaintiff’s loss and some other parties are responsible for the remaining 70 per cent of the loss, the plaintiff could still sue the defendant for 100 per cent of the loss. Following that action, the defendant could seek to recover some amounts by way of contribution against other parties concurrently responsible for the loss. Practically, this means that plaintiffs often commence proceedings against those defendants with the deepest pockets, which in a construction setting would often be the designer with its professional indemnity insurance policy.

Because insurance premiums were increasing, parliaments around Australia introduced proportionate liability regimes – that is a defendant will only be liable for loss suffered by a plaintiff to the extent that it was responsible for that loss. For example, if the designer was responsible for 30 per cent of the owner’s loss, then it would only be liable to compensate the owner for 30 per cent of its loss, not 100 per cent of its loss under the ordinary “Joint and Several Liability” rules.

A key feature of the proportionate liability regime is the ability to join concurrent wrongdoers so that the plaintiff or claimant is only required to commence one proceeding with all the defendants as parties.

Proportionate Liability and Arbitration

It is well recognised that arbitration and proportionate liability do not sit together comfortably because arbitration, being a consensual process between the parties, is only binding on those parties. It is outside an arbitrator’s power to join third parties. Therefore, if proportionate liability applied to arbitration, a plaintiff may be required to commence another proceeding against the third party (or parties) to try and recover the proportion of the loss it suffered that could not be awarded by the arbitrator.

Curtin University of Technology v. Woods Bagot Pty Ltd

There have been some judicial comments suggesting that proportionate liability does not apply to arbitration2, however nothing as authoritively stated as in this recent Supreme Court of Western Australia decision.

In this case, the parties and the arbitrator referred the following question to the Supreme Court of Western Australia (summarised for this note): does the proportionate liability regime apply to commercial arbitrations in Western Australia? The answer from the Court was no.

A summary of the Court’s reasons is as follows:

  1. Arbitrations in Western Australia must (pursuant to domestic arbitration legislation in place throughout Australia) be conducted “according to law”.
  2. “According to law” means the common law, which does not include legislation.
  3. The proportionate liability regime is founded in legislation.
  4. For an arbitrator to apply legislation, such as the Australian Consumer Law (or the repealed Trade Practices Act), there must be a term, express or implied (in practice often implied) that the parties agree that the arbitrator is to have regard to that legislation in determining the arbitration proceedings.
  5. Whether there was an implied term in this case unfortunately was not put to the Court on the case stated, rather the Court was limited to deciding, as a matter of statutory interpretation, whether proportionate liability legislation applied to arbitrations.
  6. The Court determined that it did not apply because (among other things) the proportionate liability legislation:
    1. contained key references to “court” and “judgment” which are terms that do not capture arbitration proceedings; and
    2. as a key feature, allowed parties, without their consent, to be joined to the proceeding - however that is not permitted for an arbitration proceeding.

When one reads the Court’s decision, it appears that the Court would have held (if the question had been put to the Court) there was no implied term in the arbitration agreement that the arbitrator should have regard to the proportionate liability regime. Because that question was not put, that question became a matter for the arbitrator to decide. Practically, this implied term issue could be resolved by an express term in the contract providing that the proportionate liability regime does not apply to any arbitration initiated by the parties.

There are differences in the proportionate liability legislation in each state and territory of Australia; however this case will be a persuasive authority to any arbitrator considering whether the proportionate liability legislation applies to that arbitration.

So for all intents and purposes, proportionate liability legislation will not apply to arbitrations in Australia.