Allens

Construction & Major Projects

Focus: Dispute resolution clauses – follow the Yellow Brick road

5 October 2012

In brief: The Queensland Supreme Court has confirmed that, where possible, it will hold parties to the dispute resolution procedures in a construction contract before it allows recourse to legal proceedings. Partner Adrian Baron and Lawyer Laura Nagy report.

How does it affect you?

  • The case of Downer EDI Mining Pty Ltd v Wambo Coal Pty Ltd 1 reinforces the need for parties to ensure that they are comfortable with the dispute resolution procedures in their construction contracts and to further ensure that, practically, these procedures are achievable.
  • It does not appear likely that a court will interfere and allow recourse to legal proceedings without the parties first attempting to resolve a dispute according to the procedures agreed in the contract.

The facts

Downer EDI Mining and Wambo Coal entered into an operation agreement in March 2008, whereby Downer would provide, among other things, maintenance of plant and equipment services to Wambo. Under the contract, Wambo's payments to Downer were to go into a separate bank account, and Downer was to draw down from this account to cover the cost of the services it was providing. The parties agreed that they would share equally any monies left in this account at the end of the contract.

A dispute arose when Wambo stopped making payments for maintenance in accordance with the contract. Downer alleged that, by stopping payment, Wambo was in breach of the contract. Counsel for Wambo argued that it was inevitable that there would be a surplus in the draw down fund and Wambo would 'thus be paying money into a fund of which it would only recover half when the contract comes to an end'.2

Downer applied to the court for resolution of the dispute. Wambo applied for an order staying these proceedings until Downer had complied with the dispute resolution procedure in the contract.3 It is this issue that this Focus will consider.

Ultimately, his Honour Justice Martin ordered a stay of the proceedings until the parties had complied with the contract's dispute resolution procedure.

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Contractual background

The dispute resolution procedure was set out in clause 46 of the contract.

Clause 46.1 purported to make the dispute resolution procedure a condition precedent to the commencement of legal proceedings. It provided:

46.1 Condition precedent to start of proceedings

If any dispute between the parties arises from this Contract (whether during the Term of, or after termination of, this Contract) (Dispute), the parties agree to resolve it in the manner set out in this clause, and a party may not commence court proceedings concerning the Dispute unless:

  1. the party starting proceedings has complied with this clause; or
  2. the party starting proceedings seeks urgent interlocutory relief; or
  3. another party has first started proceedings other than under this clause; or
  4. the Dispute has been referred to an Expert under clause 46.4 and the Expert has not made a decision within the 20 Business Day period specified in clause 46.7(a)(vii); or
  5. there is manifest error in the Expert's decision.

The remainder of the dispute resolution procedure was contained more broadly within clause 46 of the contract. His Honour summarised this as follows:

  1. a dispute arises;
  2. the party alleging the existence of the dispute must notify the other party of the dispute and specify its nature by means of a 'Dispute Notice' (there is no time limit for this);
  3. after a Dispute Notice has been given, the parties have five days in which to prepare and exchange position papers;
  4. five days after the position papers are due to be exchanged, the PCG [Project Review Group] 'will hold a meeting and the parties will attempt to resolve the dispute';
  5. if the PCG has not resolved the dispute within five days of its meeting, the BRG [Business Review Group] must meet and 'use its best endeavours to resolve the dispute';
  6. if the BRG has not resolved the dispute within ten days of its meeting then the chief executive officers of each party must meet within a further ten days and 'use their best endeavours to resolve the dispute' 4

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Reasoning

The basis of Wambo's stay application was that:

  • 'Downer had not satisfied a condition precedent to its right to commence proceedings because it had failed to comply with the dispute resolution procedure in the contract;5 and
  • alternatively, in the exercise of the court's inherent jurisdiction, the court should require Downer to comply with the dispute resolution procedure. The proceedings should be stayed until such compliance had occurred.'6

In considering the application of dispute resolution clauses generally, Justice Martin considered:

There is no relevant difference, in principle, between an expert determination clause and a dispute resolution clause. It is a product of the parties' agreement and it has never been the policy of the law to discourage the parties from resolving their differences in this way.7

His Honour concluded that clause 46 did not 'purport to oust the jurisdiction of the court; rather, it makes compliance with its terms a condition precedent to the commencement of legal proceedings'.8 In reaching this view, he referred to Straits Exploration (Australia) Pty Ltd v Murchison United NL,9 which stated:

The tendency of recent authority is clearly in favour of construing such contracts, where possible, in a way that will enable expert determination clauses to work as the parties appear to have intended, and to be relatively slow to declare such provisions void either for uncertainty or as an attempt to oust the jurisdiction of the court.10

Uncertainty

In attempting to resist the application for a stay, Downer argued that the dispute resolution procedure was so vague and uncertain that it was unenforceable,11 pointing to the following alleged shortcomings.

First, '[n]o procedures exist for the contingency where the required representatives are incapable of meeting within the specified time'.12 Downer argued that the dispute resolution procedure could fail if the PCG could not meet in time, which meant that the catalyst for the timing of the BRG meeting would not have occurred.

On this point, his Honour concluded:

[T]he lack of any mechanism to deal with the impossibility of holding a meeting within time does not render the procedure uncertain. It only means that the procedures set out in the clause may not be able to be completed if, for some reason consistent with parties' duty, the BRG could not meet.13

Second, '[t]here is a time limit for the BRG to resolve the dispute, but no time is set for the holding of a meeting of the BRG if the PCG has failed to resolve the dispute'.14

His Honour considered it appropriate to imply a period of time within which the BRG should meet. Given the other timeframes fixed for performance of the steps in the dispute resolution procedure, he believed 'it would seem most likely that a reasonable time for the BRG to meet would be no more than ten days after the expiration of the time for the PCG to attempt to resolve the dispute'.

Third, 'The requirement that the PCG "attempt to resolve" the dispute lacks a readily ascertainable objective standard or norm by which one may assess whether there has been compliance with cl 46.3(b) [which sets out the requirement for the PCG to meet and 'attempt to resolve' the dispute]'.15

Downer argued that there was uncertainty as to how an 'attempt to resolve' the dispute, as required particularly in the case of the PCG, was to be measured. It submitted that there was an 'absence of a readily ascertainable objective standard or norm by which one may assess whether there has been compliance'16 with the contract's requirements.

His Honour noted that this was an 'unusual argument', and one that was at odds with previous cases that have argued a clause was uncertain because it included an obligation to act, for example, in good faith.17 In this instance, Downer argued the opposite position.

His Honour concluded that he could not accept Downer's submission, considering that:

First, there must be a meeting – there is no uncertainty in that requirement. Secondly, the parties must attempt to resolve the dispute. There is no need to qualify the word 'attempt' in order to achieve certainty.

Futility

In addition to alleging the dispute resolution procedure was uncertain, Downer argued that it would be futile for the PCG and BRG to meet because:

  • 'meetings [had] been held on at least three occasions and those meetings were attended by persons holding high positions in both parties';18
  • 'there [had] been other discussions between the parties about the maintenance fund';19 and
  • 'none of those meetings or discussions [had] resolved the dispute'.20

Downer maintained that whenever the issue of the maintenance fund was raised, it was 'met with intransigence on the part of Wambo at a high level of decision making'.21 Downer alleged that the dispute resolution procedure could therefore not 'succeed in the sense that it could not lead to a resolution of the dispute between the parties'.22 For its part, Wambo stated that it was ready and willing to participate in the process.

In dismissing Downer's submission, his Honour referred to Hooper Bailie Associated Ltd v Natcon Group Pty Ltd, where Justice Giles emphasised the need for participation in a procedure from which 'consent and cooperation might come'.23

His Honour concluded that this was not a case where the parties had embarked on the dispute resolution procedure and had, through satisfactory evidence, demonstrated that it was pointless to continue with it as a means of resolving the dispute.24 Ultimately, Justice Martin considered Downer had not demonstrated that compliance with the dispute resolution procedure would be futile.

His Honour allowed Wambo's application and ordered the proceedings be stayed until the parties had complied with the dispute resolution procedure.

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Conclusion

The case reinforces the need for parties to ensure that they are comfortable with the dispute resolution procedures drafted into their construction contracts and to ensure that they are achievable. This applies equally to all forms of dispute resolution clauses, from executive discussions through to expert determinations and arbitration.

It does not appear likely that a court will interfere and allow recourse to legal proceedings without the parties first attempting to resolve a dispute according to the procedures agreed in the contract. Where a court does ultimately intervene in a dispute, it seems clear that it will interpret the dispute resolution clauses so as to enable them to work as the parties appear to have intended.25

Dispute resolution clauses are often not paid sufficient attention during negotiations to ensure that they are carefully drafted to remove 'gaps' or inconsistencies. Ultimately, a party should be careful of what it has wished for, as it might just get it.

Footnotes
  1. [2012] QSC 290.
  2. At [5].
  3. At [1].
  4. At [19].
  5. At [2].
  6. Ibid.
  7. At [8] citing Dobbs v National Bank of Australasia Ltd [1935] HCA 49.
  8. At [7].
  9. Straits Exploration (Australia) Pty Ltd v Murchison United NL [2005] WASC 241.
  10. Straits Exploration at [14] cited in Downer at [10]. His Honour considered expert determination clauses were analogous with arbitration clauses and dispute resolution clauses generally.
  11. Downer at [3].
  12. At [21].
  13. At [20(a)].
  14. At [21].
  15. Ibid.
  16. Ibid.
  17. See United Group Rail Services Ltd v Rail Corporation New South Wales (2009) 74 NSWLR 618.
  18. Downer at [22].
  19. Ibid.
  20. Ibid.
  21. At [23].
  22. At [27].
  23. Hooper Bailie Associated Ltd v Natcon Group Pty Ltd (1992) 28 NSWLR 194 at [206].
  24. Downer at [29].
  25. As per the position in Straits Exploration.

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