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Focus: No default option to litigate in dispute resolution clause

7 July 2011

In brief: A recent New South Wales Court of Appeal decision has continued the trend of interpreting alternative dispute resolution clauses consistently with commercial commonsense. Partner Brian Millar and Senior Associate Matthew Senescall report on the decision, and consider the lessons for parties interpreting existing dispute resolution procedures and negotiating those clauses in future contracts.

How does it affect you?

  • Courts are continuing the trend of interpreting dispute resolution clauses having regard to the premise that commercial parties are unlikely to have intended multiple venues or occasions for the resolution of their disputes unless they have said.
  • If parties provide for a specified dispute resolution process to be final and binding unless certain steps are taken, they must be careful to stipulate what those steps are, and be aware of their consequences. Parties should not assume that a default position of being able to commence litigation will apply, unless this is expressly preserved by the relevant clause.

The facts

The decision – in Lipman Pty Ltd v Emergency Services Superannuation Board1 – concerned a determination by experts appointed under a dispute resolution clause of a building contract, and whether that determination was final and binding or whether it could be re-agitated through litigation.

The relevant parts of the dispute resolution clause provided as follows:

42.10 Determination by an Expert

The determination of the expert:

(a) must be in writing;

(b) will be:

(i) substituted for the relevant direction for the Superintendent; and

(ii) is final and binding

unless a party gives notice of appeal to the other party within 21 days of the determination; and

(c) is to be given effect to by the parties unless and until it is reversed, overturned or otherwise changed under the procedure in the following clauses.

42.11 Executive Negotiation

If a notice of appeal is given under clause 42.10, the dispute is to be referred to the persons described in Annexure Part A who must:

(a) meet and undertake genuine and good faith negotiations with a view to resolving the dispute; and

(b) if they cannot resolve the dispute or difference, endeavour to agree upon a procedure to resolve the dispute.

The parties agreed to the appointment of two experts, under the provisions of clause 42, to resolve a disputed claim. The experts determined that a small amount was payable by the plaintiff to the defendant. The plaintiff gave notice of appeal under clause 42.10(b). Executive negotiations were held under clause 42.11, but were unsuccessful – the dispute was neither resolved nor was there an agreement on a procedure to resolve it. The plaintiff then purported to exercise what it referred to as the default option, by commencing Supreme Court proceedings. The defendant moved to have the proceedings dismissed, on the basis that the parties were bound by the expert determination.

The decision

The primary judge considered that the procedure under clause 42.11 had done whatever work it could do and the expert determination was not reversed, overturned or otherwise changed.2 Accordingly, his Honour's view was that the expert determination remained binding. He considered that if this construction involved an abrogation of the parties' common law rights, then this was the clear intention of the two commercial parties. His Honour considered that to give the clause the plaintiff's construction would mean the parties intended that the same disputes be resolved before different tribunals, which was unlikely.

The Court of Appeal agreed and took the opportunity to endorse specifically the liberal approach adopted in relation to the construction of dispute resolution clauses in such recent decisions such as Francis Travel Marketing Pty Ltd v Virgin Atlantic Airways Ltd, Fiona Trust & Holding Corporation v Privalov and Comandate Marine Corporation v Pan Australia Shipping Pty Ltd3. That these cases were concerned with arbitration clauses and not expert determination clauses did not, in the Court of Appeal's view, detract from their equal force in applying to the expert determination clause the subject of this case.

The court considered that such an approach gave effect to a coherent business purpose, through an assumption that commercial courts around the world would make that parties are unlikely to have intended multiple venues or occasions for the resolution of their disputes unless they have said.

Implications

When negotiating the terms of a contract, parties need to consider carefully the proposed dispute resolution procedures and their consequences. They should consider whether they want the result of any expert determination, or other alternative dispute resolution process, to be binding. If so, they must also consider whether they intend for it to be binding in all cases or only in certain circumstances. For example, the dispute resolution procedure in the NSW GC21 Standard Form Contract provides for the outcome of an expert determination to be binding if the amount awarded is less than a certain monetary sum, and many standard form contracts expressly provide for final determination by the courts or an arbitrator if the parties cannot otherwise resolve the dispute.

In light of this decision, parties ought to provide expressly for a right to arbitrate or litigate following the completion of other alternative dispute resolution processes, if that is what they intend, and not assume that a default option to litigate will apply.

Footnotes
  1. [2011] NSWCA 163.
  2. Both parties accepted that the clause was given effect to by the negotiations and neither party contended that clause 42.11 was void for uncertainty.
  3. (1996) 39 NSWLR 160; [2007] UKHL 40 and [2006] FCAFC 192, respectively.

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