CONSTRUCTION Alert: Commercial arbitrations: what if a non-party is partially liable?

Aug 22 2017

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Commercial arbitrations are held between parties to a contract exclusively, meaning non-parties cannot be joined to arbitration proceedings.  This article considers the circumstances that may arise where a contract has an arbitration clause, and a party outside of the contract is partially liable for a claimant’s loss.  There are a number of questions that arise within this scenario.  Can the parties commence court proceedings instead?  Can the claimant recover 100% of its loss if a party outside the contract is also at fault?  Must the respondent pay the full amount of damages even if they are only partly liable?  And if so, can a respondent recover from the non-party some of the damages paid to the claimant?

1. Arbitration in Australia

Commercial arbitrations are governed at a state level by various Commercial Arbitration Acts (CAA).  One of the CAA’s objectives is to create an environment that encourages better use of the domestic commercial arbitration regime to ensure that businesses have better access to processes for the fair and final resolution of commercial disputes by impartial arbitral tribunals without unnecessary delay or expense.

Arbitrations are becoming increasingly attractive as an alternative to litigation within the construction industry.  The arbitration process is private and confidential, which provides an obvious benefit for companies wanting to keep commercially sensitive information or awards from being publically available in addition to reducing the risk of reputational damage.  Parties also have more control over the process of an arbitration.  For example, the parties can agree on the identity of the arbitrator, the jurisdiction of the arbitration, and the place in which the arbitration is to be held.

2. Non-parties and arbitral proceedings

In addition to reducing the potential delay and expense associated with litigation, another essential difference between arbitration and court proceedings is that the parties have elected the manner of resolving disputes that may arise between them.

An arbitrator’s jurisdiction springs from the agreement between the parties to the arbitration.  Unlike the courts, arbitrators have no power to join other wrongdoers to an arbitration without their consent.  To do so would mean adding parties to the arbitration who had not agreed to be bound by the relevant arbitration agreement.  In order to add non-parties to arbitration proceedings, the consent of all parties is required (which is unlikely to be forthcoming from the non-party).

3. Does proportionate liability apply in arbitration?

If a non-party refuses to be joined to arbitration proceedings, will the contracting party be liable for 100% of the damages awarded to the claimant in the arbitration even if it is only partially responsible?  A case is yet to come before the Queensland courts on this issue, though a Western Australian decision suggests the answer is yes.

In Curtin University of Technology v Woods Bagot [2012] WASC 449, Curtin University of Technology and Woods Bagot were involved in an arbitration following a dispute arising under a construction contract.  In the arbitration, Woods Bagot sought to rely on the proportionate liability regime under the Civil Liability Act 2002 (WA) (CLA) (which also exists in each jurisdiction), under which courts can apportion liability for the loss between the wrongdoers according to their respective responsibility for the loss.

It was held that the proportionate liability regime was inapplicable in arbitral proceedings.  The case turned on the words of section 22 of the Commercial Arbitration Act 1985 (WA), which provided that any question to be answered by way of arbitration “shall be determined according to law”.  The court ultimately held that “according to law” meant “according to the principles of common law”, and not statutes like the CLA, in which the proportionate liability regime sits.

In other words, concurrent wrongdoers under the CLA cannot be joined as a party to an arbitration by the application of that legislation.

4. Can court proceedings be commenced instead of arbitration?

If a non-party cannot be joined to an arbitration, and proportionate liability regimes are not applicable to an arbitration, can you proceed straight to litigation instead (in the face of an otherwise binding arbitration agreement)?

Litigation may only be commenced in lieu of arbitration if all parties to the arbitration agreement consent.   It will usually be more beneficial for the claimant to arbitrate, as it will only need to pursue the liable contracting party, rather than any concurrent wrongdoers outside of the contract, either in separate arbitral proceedings or in court.

In 2015, John Holland tried to commence proceedings against Kellogg Brown & Root (KBR) and Atlantis, in circumstances where its contracts with each of the defendants respectively contained arbitration agreements (which first required the parties to negotiate) which could not be varied other than in writing.[1]

John Holland was engaged by Downer EDI Rail to design and construct the Auburn Maintenance Centre, a rail facility in New South Wales.  John Holland entered into two contracts:

(a) first, engaging KBR to furnish certain design and documentation services including the design of stormwater detention facilities; and

(b) second, engaging Atlantis to design, manufacture, supply and certify the stormwater detention facilities.

Atlantis installed a modular tank system under a car park for the purpose of providing storm water detention. John Holland claimed that about three and a half years after construction, subsidence of the pavement in the car park was observed. It was a possibility that Laing O’Rourke (a non-party) was responsible, as it had been carrying out building and excavation works on an adjoining site.

John Holland sued KBR and Atlantis claiming damages for breach of contract, negligence and indemnity against all loss or damage arising out of breaches or other wrongful acts or omissions on their part.

Prior to the commencement of court proceedings, John Holland had attended what was agreed by the parties to be a ‘negotiation’ with KBR satisfying the pre-requisite to arbitration proceedings, but no negotiations had yet taken place between John Holland and Atlantis.  The court held that KBR was entitled to an order referring John Holland and it to arbitration.  Atlantis was entitled to a stay in the action, but was not referred to arbitration as negotiation had not yet occurred.

5. Conclusion

If the decision in Woods Bagot is to be followed in other states, it is very likely that the proportionate liability regimes contained within each states’ respective legislation will not apply to arbitration proceedings.

Court proceedings, in which the proportionate liability regimes are applicable, cannot be commenced in lieu of arbitration proceedings unless the parties to the arbitration agreement consent.  If one party commences litigation without the consent of the other parties to the contract, the court proceedings may be stayed, and the matter referred to arbitration in accordance with the terms of the contract.

This means that in arbitration proceedings in which non-parties cannot be joined, the successful claimant will be awarded 100% of the proven loss against the responding contractual party, whether or not it was only partially responsible.

Unfortunately for the respondent, if a commercial agreement cannot be met, they must (after the completion of the arbitration) commence proceedings against any non-parties to the contract that may share in the liability, to seek to recover some of their loss.

In a construction context, there are often many contracts involved in a project, from head contracts to subcontracts, sub-subcontracts, consultancy agreements with architects, engineers and so on. It is important to be aware of the potential implications of having an arbitration clause as an alternative dispute resolution mechanism if you are party to a contract under which your ability to perform your obligations under the contract may be affected by non-parties.

You may be interested in our article ‘Contracting out of proportionate liability in Queensland – terms that might offend the statutory prohibition’https://www.tglaw.com.au/corporate/publications/qld-construction-alert-contracting-proportionate-liability-queensland-terms-might-offend-statutory-prohibition/

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[1] John Holland Pty Limited v Kellogg Brown & Root Pty Ltd [2015] NSWSC 451.

 

Written by:

Andrew Kelly | Partner | +61 7 3338 7550 | akelly@tglaw.com.au

Tom McKillop | Senior Associate | +61 7 3338 7530 | tmckillop@tglaw.com.au

Claire Harding | Lawyer | +61 7 3338 7932 | charding@tglaw.com.au