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Focus: Dispute resolution clauses: are yours enforceable?

30 July 2013

In brief: A recent Victorian Supreme Court decision has reinforced the need for dispute resolution clauses to set out the process to be followed to resolve a dispute with sufficient certainty to enable them to be enforceable. Partner Nick Rudge (view CV), Senior Associate Nicholas Gallina and Law Graduate Emily Giblin report on the case.

How does it affect you?

  • Construction and commercial contracts often include dispute resolution clauses that require a number of steps to be taken as preconditions to litigation or arbitration. This case discusses whether, and when, such clauses are enforceable.
  • Parties to contracts should take care that the dispute resolution clauses in their contracts do not leave the process to be followed to resolve disputes, to be determined by the further agreement of the parties. Dispute resolution clauses that contain alternative methods of resolving a dispute should also clearly specify the order in which those methods are to be pursued.
  • Failure to clearly specify the dispute resolution process to be followed is likely to result in the clause being declared uncertain and unenforceable.

The facts

A dispute arose between the supplier of a co-generation plant to be fired by paper mill residues, RCR Energy Pty Ltd, and the principals, WTE Co Generation and Visy Energy Pty Ltd. Litigation was commenced after one of the principals purportedly terminated the contract.

The supplier applied to have the litigation stayed on the basis that the contract's dispute resolution clause had not been complied with. The principals opposed the stay application on the basis that the dispute resolution clause was uncertain and hence unenforceable. The issue before the court was whether the dispute resolution clause was sufficiently certain.

The decision

The dispute resolution clause required an initial meeting of the parties following a written notice of dispute. If the dispute was not resolved the clause provided, critically, that:

'within a further 7 days a senior executive representing each of the parties must meet to attempt to resolve the dispute or to agree on methods of doing so.' 1 [Emphasis added.]

The clause then went on to provide that '[i]f the dispute has not been resolved within 28 days of service of the notice of dispute, that dispute may be referred to litigation'.2

The supplier argued that the court should stay the litigation because a senior executive meeting never occurred which meant that the requirements of the dispute resolution clause had not been satisfied. The principals argued that the clause was not sufficiently certain because of the requirement that the senior executives had to agree on methods of resolving the dispute.3

The court indicated that a dispute resolution clause would be void for uncertainly if the process was not sufficiently certain. Justice Vickery referred with approval to the statement of Justice Giles in Hooper Bailie Associated Ltd v Natcon Group Pty Ltd4 that

'[w]hat is enforced is not cooperation and consent but participation in a process from which consent might come' 5

and the subsequent statement of Justice Einstein in Aiton Australia Pty Ltd v Transfield Pty Ltd6 that

'[i]t is for this reason that the process from which consent might come must be sufficiently certain'.7

Justice Vickery refused to grant a stay because his Honour's view was that the process established by the contract's dispute resolution clause was insufficiently certain to be enforceable.8 His Honour took this view for two reasons. First, the clause provided that the parties must meet, either to attempt to resolve the dispute, or to agree on methods for doing so. In his Honour's view, this was uncertain because the clause did not provide a process to determine which out of the two options should be pursued.

Second, one of the requirements of the clause was for the senior executives to 'agree on methods of [resolving the dispute]' in circumstances where the contract did not specify what method should be adopted. This his Honour said meant 'the method of resolving the dispute is to depend on the parties['] further agreement as to the method to be employed'.9 This amounted 'to an agreement to agree on the process of dispute resolution to be employed'.10

His Honour drew a distinction between the clause before him and the dispute resolution clause that was found to be enforceable in United Group Rail Services Ltd v Rail Corporation of New South Wales.11 That clause provided for senior representatives of each party to

'meet and undertake genuine and good faith negotiations with a view to resolving the dispute or difference.'12

This clause did not include the words 'or agree on methods of doing so'. Justice Vickery found this set it apart from the clause before him and distinguished the United Group Rail Services decision on this basis.

Justice Vickery outlined the following principles which guide courts when it come to assessing the certainty of dispute resolution clauses that are expressed to be pre-conditions to litigation or arbitration:13

  • courts should generally be slow to declare dispute resolution clauses void for uncertainty;
  • dispute resolution clauses should be interpreted 'robustly' by avoiding 'a narrow or pedantic approach in favour of a commercially sensible construction' with the objective of upholding the parties' bargain;
  • the use of broad and general words will not make a dispute resolution clause uncertain if a sensible meaning can be given to them;
  • a dispute resolution process does not need to be 'overly structured' to be certain – a 'court does not need to see a set of rules set out in advance by which the agreement, if any, between the parties may in fact be achieved'; and
  • a 'contract which leaves the process or model to be utilized for the dispute resolution ill defined, or the subject of further negotiation or agreement, will be uncertain'.

Conclusion

This decision confirms that courts will continue the trend of construing dispute resolution clauses broadly. This should give parties comfort that courts will be generally be slow to declare such clauses uncertain. However, parties should ensure that the dispute resolution clauses in their contracts describe the process of dispute resolution to be followed with sufficient certainty because the failure to do so will likely result in the clause being declared uncertain and hence unenforceable.

Footnotes
  1. WTE Co-Generation & Anor v RCR Energy Pty Ltd & Anor [2013] VSC 314 at [12].
  2. Ibid. at [12].
  3. Ibid. at [30].
  4. (1992) 28 NSWLR 194 at [206].
  5. WTE Co-Generation & Anor v RCR Energy Pty Ltd & Anor [2013] VSC 314 at [33].
  6. [1999] NSWSC 996 at [61] – [62].
  7. WTE Co-Generation & Anor v RCR Energy Pty Ltd & Anor [2013] VSC 314 at [34].
  8. Ibid. at [47] and [48].
  9. Ibid. at [42] – [44].
  10. Ibid. at [47].
  11. (2009) 74 NSWLR 618.
  12. WTE Co-Generation & Anor v RCR Energy Pty Ltd & Anor [2013] VSC 314 at [18] – [23].
  13. Ibid. at [39].

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