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Focus: Compliance with multi-tiered dispute resolution clauses

28 July 2016

In brief: The Queensland Supreme Court has stayed proceedings on the basis that the parties did not follow the agreed contractual provisions for the proper escalation of a dispute. Partner Leighton O'Brien (view CV), Senior Associate Julian Berenholtz and Law Graduate Flora Ma report on the decision that emphasises the importance of constructing appropriate dispute resolution clauses for each transaction. 

 
 

How does it affect you?

  • The decision in Santos Limited v Fluor Australia Pty Ltd1 confirms the reluctance of courts to dismiss agreed dispute resolution provisions, which should not be ignored and cannot, save for in exceptional circumstances, be avoided.
  • Parties must consider, at the outset of a transaction, whether the dispute resolution mechanism is appropriately adapted for the parties' needs.
  • An alternative dispute resolution (ADR) agreement will be enforceable despite the fact that the relevant dispute is one of contractual interpretation, and irrespective of the fact that the mechanism has failed to produce an agreed outcome, in respect of similar disputes, in the past.

The facts

Santos and Fluor entered into an EPC contract for the GLNG Project in 2011. The terms of the contract were varied to allow for payment based on actual costs, plus a further fee and any incentives to which Fluor was entitled.

Fluor had claimed (and was paid) over $1.8 billion more than the target budget estimate. As a result, Santos exercised its audit rights under the contract and sought to access Fluor’s records to confirm that the amounts claimed by Fluor were in fact costs that Fluor was entitled to claim under the contract.

Following correspondence between the parties regarding Santos’ request for information, Santos filed an application seeking an order that Fluor provide access to the requested materials. Fluor sought a stay of that application on the basis that the parties had not yet complied with the dispute resolution process set out under the contract.

The dispute

The contract included a multi-tiered dispute resolution clause, requiring without prejudice meetings between company representatives and then further meetings between senior representatives before litigation could be commenced.

Santos did not invoke the procedure set out under the contract and argued that the parties' correspondence made it clear that carrying out these meetings would be impractical and useless. Santos contended that the dispute regime had failed to assist the parties to resolve two previous audit rights disputes which had both been litigated before a compromise was reached. In Santos' view, staying the proceedings would only further delay the resolution of the dispute, which was ultimately likely to occur in court.

Counsel for Santos argued that the dispute related to the proper construction of the payment provision. They also stated that the parties were unlikely to compromise on their positions and therefore it ought to be to determined swiftly in court rather than through compromise or agreement.

Fluor's position was that the prior failure of dispute resolution meetings to achieve a result did not mean that the contractual procedure could be avoided. It was submitted that the dispute resolution meetings were likely to have influenced the previous settlements and also had some utility in defining or narrowing the scope of the dispute.

The decision

Unsurprisingly, the court ordered a stay of the proceedings pending the performance of the parties' obligations under the dispute resolution mechanism.

The court affirmed previous authorities in concluding that the parties should be held to their bargain in resolving disputes, unless the 'justice of the case' is against staying a proceeding.2 In this case, Santos, as the party opposing the stay, was unable to discharge the heavy burden of proof for the court to exercise its discretion. It followed that the dispute resolution clause was enforceable and there was no demonstrated unwillingness or inability of the parties to adhere to the process.

The court cited the English decision of Cable & Wireless plc v IBM UK Ltd3 where Justice Colman stated that:

…[P]arties who enter into an ADR agreement… must be taken to appreciate that mediation as a tool for dispute resolution is not designed to achieve solutions which reflect the precise legal rights and obligations of the parties, but rather solutions which are mutually commercially acceptable ...

 

at the time. It followed, in Justice Douglas' view, that Santos' failure to initiate the dispute resolution procedure in the contract provided no good reason why it should be entitled to 'sidestep' it and have the matter resolved in court. It was also in the public interest to avoid the potentially unnecessary use of court time and reduce the costs of civil litigation.

Footnotes
  1. [2016] QSC 129.
  2. See Zeke Services Pty Ltd v Traffic Technologies Ltd [2005] 2 Qd R 563, 569 at [21]; Badgin Nominees Pty Ltd v Oneida Ltd [1998] VSC 188.
  3. [2002] EWHC 2059 (Comm).

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