Planning for when things go wrong – the enforceability of dispute resolution clauses in contracts

When parties enter into a contract, there is rarely thought given to what happens if the relationship breaks down or one party breaches the agreement. However, having an effective dispute resolution clause in one’s contract can be crucial in being able to properly deal with any disputes that arise and avoid forcing parties into litigation.

Unfortunately, the rules around the enforceability of dispute resolution clauses are somewhat unclear, and many contracting parties may be in danger of discovering that the provisions they have in their contracts may not be enforceable in the event business goes sour.

The Victorian Supreme Court case of WTE Co-Generation & Anor v RCR Energy Pty Ltd & Anor [2013] VSC 314 provides a useful example of the considerations a court will take into account when assessing the enforceability of a dispute resolution provision.

Background

WTE Co-Generation (WTE), through VISY Energy Pty Ltd, and RCR Energy Pty Ltd (RCR), had entered into a contract for the supply of a co-generation facility, intended to be fired by paper mill residues. The value of the contract was in excess of $20 million.

WTE alleged a breach of the contract on account of a novation of the contract, and commenced proceedings against RCR, as well as against RCR Tomlinson as guarantor.

RCR brought an application that the proceedings be stayed until such time that the parties engage in alternative dispute resolution in line with the parties’ purported obligations under clause 42 of the contract.

The provision in dispute

Clause 42.2 held that:

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. At every such conference each party shall be represented by a person having authority to agree to such resolution or methods. All aspects of every such conference except the fact of occurrence shall be privileged. 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 sought to rely on clause 42.2 and were asking the Court to order a temporary stay until the parties had a chance to comply with the dispute resolution requirements.

WTE submitted that the clause was uncertain and unenforceable.

The Court was asked to make a ruling on whether clause 42.2 was a valid dispute resolution clause.

The Court’s considerations

In its decision, the Court provided a useful summary of the existing law regarding the enforceability of contractual dispute resolution as a pre-condition to litigation:

1. Equity will not order specific performance of a dispute resolution clause, even if it satisfies the legal requirements.
2. The Court may achieve the enforcement of such clauses by ordering that a proceeding commenced in breach of such a clause be stayed or adjourned until such time that the dispute resolution process referred to in the clause is completed.
3. A clause will be found to be unenforceable if it is found to be uncertain.
4. Dispute resolution clauses should be construed robustly to give them commercial effect.
5. Public policy requires, where possible, that dispute resolution clauses that promote efficient dispute resolution be enforceable.
6. The trend of recent authority is to favour construing dispute resolution clauses as enforceable where possible in a way to enable them to work as the parties intended, and to be slow to declare them as void for uncertainty or an attempt to oust the inherent jurisdiction of the court.
7. The court does not need a set of rules set out in advance, and the process need not be overly structured, but a contract which fails to define the model of the dispute resolution, or requires it to be the subject of further negotiation and agreement, will be uncertain and unenforceable.

The Court’s decision

Notwithstanding the recent trend of erring on the side of enforcing dispute resolution clauses, the Court held that clause 42.2 was unenforceable. The Court reached that decision for a number of reasons:

1. The dispute resolution process established by the clause was uncertain, the parties were required to either meet to resolve the dispute, or agree on a method of doing so, yet no process was prescribed for determining which option to pursue.
2. No particular method of resolving the dispute is prescribed – it relied on further agreement by the parties.
3. While the Court can give commercial effect to a poorly drafted clause, what it cannot do is substitute a process or mechanism of its own creation in situations where the parties have failed to do so themselves. That would effectively involve the Court in the drafting of the contract, where its role is refined to construction of its terms.
4. Clause 42.2 was too uncertain for the Court to give effect to commercial certainty as it failed to specify an agreed process for dispute resolution and relied on further undefined and unspecified agreement between the parties.

Key takeaways

Dispute resolution clauses are important yet often overlooked when parties are negotiating contract terms. They are able to slow down the rapid escalation of a dispute and allow parties time to negotiate, before the matter ends up before the courts.

This case reminds us that the primary consideration when drafting an enforceable dispute resolution clause is certainty – it is important to precisely outlines the parties’ rights and responsibilities under the clause, as well as the scope and the method by which the dispute resolution will take place.

Queries

If you have any questions about this article, or the matters raised within, please get in touch with one of our Key Contacts or any member of our Litigation & Dispute Resolution team.

Disclaimer

This information and the contents of this publication, current as at the date of publication, is general in nature to offer assistance to Cornwalls’ clients, prospective clients and stakeholders, and is for reference purposes only. It does not constitute legal or financial advice. If you are concerned about any topic covered, we recommend that you seek your own specific legal and financial advice before taking any action.