The low down on dispute resolutions clauses

Most construction contracts include dispute resolution clauses. A poorly drafted dispute resolution clause can, ironically, be the subject of significant disputes. It is preferable to spend some time prior to entering into the contract carefully determining the process for how disputes will be resolved rather than spending a significant amount of time and money attempting to resolve the dispute when it arises.

Enforceability of dispute resolution clauses

A good dispute resolution should:

• clearly detail a structured process for the parties to follow; and
• be expressed to be mandatory and a pre-condition to legal proceedings.

Courts will generally attempt to hold the parties to their bargain (i.e. the terms of the contract) and dispute resolution clauses are construed robustly to give them commercial effect.

If a party commences court proceedings without first complying with the dispute resolution procedures required by the contract, the other party may apply to the court for a stay (freeze) of the proceedings pending the outcome of the dispute resolution process under the contract. The court will generally grant a stay of the proceedings if it is determined that the dispute resolution clause is enforceable, save for where the court determines that there would no reasonable utility in the dispute resolution process being followed.

Court proceedings are generally expensive and protracted. Engaging in alternative dispute resolution methods such as mediation or expert determination can often save the parties significant time and money.

Recent cases before the NSW Supreme Court of Appeal regarding dispute resolution clauses

Recently, the NSW Supreme Court of Appeal had to determine three cases where the terms of dispute resolution clauses themselves were the subject of dispute which included:

• Lepcanfin Pty Ltd v Lepfin Pty Ltd [2020] NSWCA 155;
• Australian Health & Nutrition Association Ltd v Hive Marketing Group Pty Ltd [2019] NSWCA 61; and
• Inghams Enterprises Pty Limited v Hannigan [2020] NSWCA 82.

Exclusive jurisdiction clause – Australian Health & Nutrition Association Ltd v Hive Marketing Group Pty Ltd

In Australian Health & Nutrition Association Ltd v Hive Marketing Group Pty Ltd [2019] NSWCA 61 the matter concerned whether the excusive jurisdiction clause should be enforced in circumstances where not all of the parties to the proceedings were parties to the dispute resolution clause.

The Court stressed the importance of holding parties to their bargain, even if all the parties were not privy to the bargain, outweighed the risk of having multiple concurrent proceedings – a consequence that could undermine confidence in the rule of law. The Court noted that even though the party was not a party to the exclusive jurisdiction clause, it may have been aware of it.

The decision is a reminder that the courts are adverse to interfering with the bargain reached between the parties.

Arbitration – Inghams Enterprises Pty Limited v Hannigan

Inghams Enterprises Pty Limited v Hannigan concerned an application for orders restraining a referral of the dispute between the parties to arbitration, on the basis that the dispute didn’t not fall within the dispute resolution clause which relevantly provided that a dispute which “concern(s) any monetary amount payable and/or owed by either party to the other under this agreement” is to be referred to arbitration.

In this instance, the Court was divided. Meagher and Gleeson JJA held that a claim for unliquidated damages was not a claim for an amount payable or owed under any express or implied terms of the Agreement, but rather, it arose from common law principles.

Bell P in dissent, stated that a liberal approach should be taken towards the construction of the dispute resolution clause and found the use of terms such as “any” indicated that the parties intended for the clause to have a wide scope.

The decision is a reminder to ensure that care is taken when drafting dispute resolution clauses to ensure that there is no uncertainty as to their interpretation.

Expert determination – Lepcanfin Pty Ltd v Lepfin Pty Ltd

The case of Lepcanfin Pty Ltd v Lepfin Pty Ltd confirmed a long line of authorities that dispute resolution clauses and agreements are to be broadly interpreted unless the words in their context requires a narrow reading.

This case concerned the scope of an expert’s mandate under an Expert Determination Agreement (EDA). The Court held that the dispute resolution clause should not be narrowly construed and that the words of the EDA were wide enough such that the expert was within her mandate to determine whether a facilitation fee payable under the development deed was a penalty. The Court held that the parties are unlikely to have intended that different disputes should be resolved before different tribunals and the clause ought to have a broad interpretation in order to avoid split proceedings and duplicated expenses.

This decision reinforces the importance of clear expression during drafting dispute resolution clauses. If parties intend to limit an expert’s mandate, then this must be expressed clearly.

Key takeaways

The key takeaways for our clients are:

• parties will be bound by the dispute resolution clauses in a contract that are sufficiently certain and mandatory, except in exceptional circumstances;
• dispute resolution clauses will generally be interpreted broadly; and
• it is essential that they contemplate the most cost efficient and advantageous process for the resolution of contractual disputes, prior to entering into the contract to avoid incurring significant time and costs when the wheels fall off the wagon.