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Australia – Dispute Resolution Clauses In Action: Requirement To Negotiate Too Uncertain To Be Enforced.

28  October, 2013

 

Legal News & Analysis – Asia Pacific – Australia – Dispute Resolution

 

Most dispute resolution clauses in commercial contracts provide for a staged process of dispute resolution requiring that the parties initially meet to attempt to resolve their dispute prior to escalating the dispute to more formal methods of dispute resolution. While there has been a trend in recent years of the courts enforcing dispute resolution clauses where possible, negotiation provisions have been susceptible to challenge on the basis that they are too uncertain to be enforceable.


The Supreme Court of Victoria was recently asked to stay a proceeding pending compliance by the parties with an obligation to negotiate prior to the commencement of litigation in WTE Co-Generation and Anor v RCR Energy Pty Ltd and Anor [2013] VSC 314. This decision serves as a timely reminder of the importance of ensuring that dispute resolution provisions are carefully drafted and clearly specify the dispute resolution process to be followed at each stage.1

 

Background


This case concerned a contract for the supply of a co-generation facility at Coolaroo in Victoria. Various disputes arose between the plaintiffs, WTE Co-Generation and Visy Energy Pty Ltd (WTE) and the defendants, RCR Energy Pty Ltd and RCR Tomlinson Ltd (RCR).


The issue for determination by the Court was whether the parties were required to meet to attempt to resolve the dispute prior to embarking on litigation.


The Contract provided as follows:


42.1 Notice Of Dispute


If a difference or dispute…between the parties arises in connection with the subject matter of the Contract…then either party shall…give the other and the Superintendent a written notice of dispute adequately identifying and providing details of the dispute. …


42.2 Conference


Within 7 days after receiving a notice of dispute, the parties shall confer at least in the presence of the Superintendent. In the event the parties have not resolved the dispute then 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.2 … If the dispute has not been resolved within 28 days of service of the notice of dispute, that dispute may be referred to litigation.


RCR contended that clause 42 of the Contract required the senior executives of the parties to meet to attempt to resolve the dispute and, as no such meeting had taken place, sought a stay of proceedings from the Victorian Supreme Court. Conversely, WTE argued that the clause was too uncertain to be enforced.


Decision


Justice Vickery found in favour of WTE. His Honour set out a very useful summary of the key principles to be applied based on recent authorities in relation to applications for a stay of proceedings in circumstances where the contractual dispute resolution process is expressed to be a pre-condition to litigation and the enforceability of that provision is in issue.


Justice Vickery observed that ‘…the trend of recent authority’3 was towards upholding dispute resolution clauses agreed by commercial parties as far as possible and for the courts ‘to be relatively slow to declare such provisions void…for uncertainty.’Further, while the Court noted that the negotiation process ‘…need not be overly structured’5 where the contract left the process or model to be utilised as the subject of further negotiation this would be too uncertain to be enforced.


Applying these principles to the facts of the case, Justice Vickery observed that once the operation of clause 42.2 had been triggered, the ‘…process established by the clause is uncertain’6 as although clause 42.2 could be complied with by the parties meeting together ‘to attempt to resolve the dispute’ (the first option), they could also satisfy this provision by meeting to ‘…agree on the methods of doing so’ (the second option).


The clause failed to prescribe a process for determining which of the two options should be pursued and in the case of the second option, left open the question of what method should be adopted to attempt to resolve the dispute. His Honour commented in this regard that ‘…the method of resolving the dispute is to depend on the parties’ further agreement as to the method to be employed.’7 Accordingly, the clause ultimately constituted ‘…an agreement to agree’ and therefore was not enforceable due to its inherent uncertainty.


What This Decision Means For You


This decision provides a useful reminder of the minimum requirements for a dispute resolution clause to be enforceable. While the case demonstrates clear judicial support for the negotiation process and a desire to uphold commercial bargains as far as possible, the dispute resolution clause must, at a minimum, set out the process or model to be employed in such a manner that does not leave this to further agreement. Accordingly, when drafting multi-tiered dispute resolution clauses, it is important to pay particular attention to both the ‘trigger’ and the requirements for completion of each stage to ensure that the dispute is able to progress seamlessly through the dispute resolution clause.

 

Endnotes

 

1. The authors, Geoff Hansen and Jennifer Galatas, gratefully acknowledge the assistance of Matt Sercombe in preparing this article.
2. The wording of this section of the clause is substantially similar to provisions that exist in various Australian Standard form contracts such as AS4300-1995, AS4000-1997 and AS 4902-2000.
3. At [39].
4. Ibid.
5. Ibid.
6. At [42].
7. At [47].

 

herbert smith Freehills

 

For further information, please contact:

 

Geoff Hansen, Partner, Herbert Smith Freehills
geoff.hansen@hsf.com

 

Jennifer Galatas, Herbert Smith Freehills
jennifer.galatas@hsf.com

 

Herbert Smith Freehills Dispute Resolution Practice Profile in Australia

 

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