16 Mar 2010

Can you avoid a proportionate liability scheme by referring all disputes to an arbitration?

by Owen Hayford, Audrey Echevarria

A recent court decision has confirmed that in most States and Territories it won’t be possible to avoid the application of proportionate liability by simply requiring disputes to be resolved by arbitration, as previously suggested by some commentators. It may still be possible to achieve the same result if the arbitration agreement clearly states that the arbitrator cannot apply the proportionate liability legislation.

As principals to construction and service contracts are more likely to be the plaintiffs (ie. the claimant) in any claim between a principal and a contractor regarding a failure by a party to take reasonable care, it is generally advantageous to principals to contract out of the application of the proportionate liability regimes operating in all States and Territories (where it is possible to do so).

This is because, in cases where the independent or joint conduct of two or more people (ie. concurrent wrongdoers) cause a plaintiff to suffer purely financial loss or property damage, the proportionate liability legislation requires liability for the plaintiff's loss to be apportioned between concurrent wrongdoers according to their respective responsibility for the loss. This means that each concurrent wrongdoer's liability is limited to the portion of the total loss which is apportioned to it by the court.

Before the introduction of proportionate liability schemes, a plaintiff could recover the whole of its loss from the concurrent wrongdoer with the deepest pockets, and that wrongdoer (or its insurer) would bear the risk of being unable to recover contribution from insolvent or untraceable concurrent wrongdoers. The proportionate liability schemes, however, transfer this risk to the plaintiff. (For more information on concurrent wrongdoers, please see Proportionate liability - some guidance on concurrent wrongdoers by Owen Hayford and Vanessa McBride).

Most State and Territory legislation is silent on whether it is possible for parties to contract out of its proportionate liability legislation. Queensland is the only jurisdiction in which it is clearly not possible to contract out of the relevant legislation.

In jurisdictions other than Queensland, there are arguably a number of possible ways in which parties can contract out of the relevant proportionate liability scheme - for example, by including an express provision stating that the relevant proportionate liability scheme does not apply, or express provisions which allow liability to be apportioned between parties in a particular way if either or both parties are subject to an apportionable claim. Western Australia, New South Wales and Tasmania expressly allow parties to contract out of proportionate liability legislation by including express provisions in the contract stating that the Act does not apply.

It has been argued that parties can also avoid proportionate liability legislation by referring all disputes arising out of the contract to arbitration or some other form of alternative dispute resolution not involving court proceedings. The underlying rationale for this stems from the fact that the legislation in all jurisdictions refers to the "court" being required to apportion liability in proceedings involving apportionable claims.

Can parties effectively contract out by referring all disputes arising out of the contract to arbitration?

The proportionate liability schemes in New South Wales, Victoria, the Northern Territory and Tasmania define "court" to include tribunals. There is a view that a tribunal includes an arbitral tribunal, which would then mean that arbitrators are required to limit, where applicable, the liability of concurrent wrongdoer in the same way a court must. There is also a contrary view that because the legislation provides that a court may give leave for persons to be joined as defendants in proceedings involving an apportionable claim, a tribunal cannot include an arbitral tribunal. This is because it is unlikely that Parliament had intended to make such a fundamental change to the arbitration process by giving, for the first time, arbitrators the power to join a stranger to an arbitration agreement without the consent of the stranger and the existing parties to the arbitration agreement.

The recent Tasmanian Supreme Court decision in Aquagenics Pty Ltd v Break O'Day Council (No 2) [2009] TASSC 89 came to the conclusion that arbitrators must apply the proportionate liability legislation in the same way as a court via a different route. Rather than looking at whether an arbitral tribunal was a "tribunal" within the meaning of "court" as defined in the Tasmanian legislation, the court held that, subject to any inconsistent express contractual terms, a contract which refers a dispute to arbitration proceedings contains an implied term that the arbitrator has authority to give the parties the same relief as is available to them in a court of law. Accordingly, it was held that where a court would be required to reduce a claimant's damages pursuant to the proportionate liability legislation, an arbitrator must similarly reduce the claimant's damages.

Because the decision in Aquagenics was based on an implied term rather than on the issue of whether an arbitrator can be taken to be a "court", it is likely that a State or Territory court applying this principle would find that arbitrators are obliged to apportion liability, even in jurisdictions where the legislation does not expressly define the term "court" to include tribunals.

As such, it seems to be the current position that, in States and Territories other than Victoria, parties cannot contract out of the proportionate liability legislation by simply referring all disputes arising out of the contract to arbitration. However, it may remain possible (even in Queensland) to achieve the same result by including an express provision in the arbitration agreement which overrides the implied term which would otherwise exist, so that it is clear that the arbitrator has no authority to give the same relief as a court in so far as under the proportionate liability legislation.

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Clayton Utz communications are intended to provide commentary and general information. They should not be relied upon as legal advice. Formal legal advice should be sought in particular transactions or on matters of interest arising from this communication. Persons listed may not be admitted in all States and Territories.