Wednesday, 29 January 2014

How to draft an enforceable dispute resolution clause

When will a dispute resolution clause be enforceable? The Supreme Court recently grappled with this question in WTE Co-Generation v RCR Energy. The decision is a helpful guide on how to create a dispute resolution clause that achieves its aim. It also highlights the danger of commercial dispute resolution clauses that are effectively 'agreements to agree', which may be unenforceable due to a lack of precision.

Background


This case related to a contract for the supply of a co-generation facility, intended to be fired by paper mill residues, for a price of in excess of $20m. While the facility was constructed, the superintendent did not certify practical completion as being reached, ultimately resulting in the plaintiff issuing a notice to the defendant purporting to terminate the contract.
 
An application was made by the defendants that the proceeding be stayed until the parties had complied with a contractual resolution clause.
 
That clause provided that:
In the event that 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.
The defendants argued that there had been no compliance with clause 42, while the plaintiffs position was that the clause was uncertain and unenforceable.
 

The Decision


Justice Vickery found that the clause effectively amounted to an agreement to agree and was therefore not enforceable due to its inherent uncertainty.
 
Justice Vickery cited with approval the statement in the New South Wales Court of Appeal decision in Coal Cliff Collieries v Sijehama Pty Ltd that '…in some circumstances a promise to negotiate in good faith will be enforceable, depending on its precise terms…'.
 
Further, his Honour set out a number of principles to determine whether a stay should be granted where a contractual dispute resolution process is expressed to be a pre-condition of litigation, including:
  1. That such clauses should be determined robustly to give them commercial effect by avoiding a 'narrow or pedantic approach in favour of a commercially sensible construction'.
  2. Where express words are at issue that are broad and general, but nevertheless have sensible and ascribable meaning, the court should give effect to such provisions.
  3. Public policy in promoting efficient dispute resolution, especially commercial dispute resolution, requires enforceable content be given to contractual dispute resolution clauses where possible.
Justice Vickery found the dispute resolution clause not to amount to a valid agreement to negotiate however, as it essentially amounted to an agreement to agree for the following reasons:
  1. Once the operation of the clause was triggered, it required the parties to either meet together to resolve the dispute, or to agree on methods for doing so. These requirements fell short of prescribing a process to determine which option is to be pursued.
  2. No method of resolving the dispute is prescribed by the clause. Rather, the clause expressly contemplates that the method for resolving the dispute is to depend on the parties' further agreement as to the methods to be employed.
His Honour outlined that, whilst a valid dispute resolution clause does not require a set of rules to be set out:
…as a minimum, what is necessary for a valid and enforceable dispute resolution clause, is to set out the process or model to be employed, and in a manner which does not leave this to further agreement. It is not for the court to substitute its own mechanism where the parties have failed to agree upon it in their contract. To do so would involve the court in contractual drafting, which is a distinctly different exercise from contractual construction of imprecise terms.
 
If you are in the Victorian Government and wish to discuss the implications of this case further, please contact:
 
Managing Principal Solicitor
t 8684 0418
 
General Counsel
t 8684 0458

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