Dispute Resolution Clauses – When are they Unenforceable?

Do your commercial agreements provide a process for parties to resolve a dispute that may arise?

Dispute resolution clauses are often simply dismissed by parties, considered to be ‘standard wording’, contained at the end of an agreement and that are unlikely to be required (particularly when the relationship between the parties is, at that stage, positive).  But these clauses can have a significant impact on how a dispute evolves and whether it can be resolved without having to resort to Court proceedings.

When a dispute arises, this is the first clause that should be reviewed and therefore, care should be taken by parties in considering these terms to understand practically how they may work if required.

A considered and appropriately drafted dispute resolution clause can be of great benefit for disputing parties, enabling them to reach a resolution without incurring significant costs through litigation, for example by fostering early negotiation between the parties. However, a failure to properly draft these terms within an agreement may leave them inoperable and unenforceable.

Example of case where Dispute Resolution Clause was deemed unclear and therefore unforceable

WTE Co-Generation & Anor V RCR Energy Pty Ltd & Anor [2013] VSC 314

In 2013 the Victorian Supreme Court decision of WTE Co-Generation & Anor V RCR Energy Pty Ltd & Anor [2013] VSC 314 held that where a dispute resolution clause is uncertain, it will not be enforceable.

In this matter, Vickery J considered the issue of a contract containing a ‘dispute resolution clause’ which was stated as a precondition to litigation. The clause specified that:

in the event the parties have not resolved the dispute then within a further seven days, senior executives representing each of the parties must meet to attempt to resolve the dispute or to agree on methods of doing so.”

As the meeting of senior executives had not occurred, RCR argued that WTE had not complied with the dispute resolution process prescribed under the Contract and applied for the proceedings to be stayed until the dispute resolution process had been observed.

WTE argued that the clause was uncertain and therefore unenforceable.

Vickery J found that the clause had failed to outline which method should be adopted for resolving the dispute and the specifics of that method. The clause required the parties to come to a further agreement on the process and for this reason, the clause was deemed to be uncertain. In particular, the court found that, as the parties were obliged to agree on the process for resolving the dispute, the clause amounted to little more than an “agreement to agree” and, as such, lacked the essential terms of a future bargain. The application to stay the proceedings was refused on that basis and the proceedings continued.

Raskin v Mediterranean Olives Estate Ltd [2017] VSC 94

The decision of WTE v RCR [2013] was more recently cited in the matter of Raskin v Mediterranean Olives Estate Ltd [2017] VSC 94. While WTE v RCR [2013] remains good law in respect of the unenforceability of uncertain dispute resolution clauses, in this matter Hargrave J took a cautious approach to accepting that decision as broadly applicable for all dispute resolution clauses.

In this matter, the parties’ dispute resolution clause provided for an Expert’s Determination in the event of dispute. The clause stipulated that:

 “If the parties are unable to resolve the dispute within 7 days after attending a settlement conference …, then either party may require the dispute to be submitted to and settled by an Independent Expert. … The decision of the Independent Expert will be final and binding on the parties. The Independent Expert must also determine which party or parties pays the costs of and incidental to the resolution of the dispute.”

Ultimately, Hargrave J upheld the plaintiff’s position that the dispute resolution clause was uncertain and therefore unenforceable, but provided that [at 34]:

The context in which the alternative dispute resolution clause appears and is intended to operate will always be a relevant factor to consider. General rules should be viewed with caution, and each case determined on its own facts.”

Implications of an unclear dispute resolution clause

As occurred in the WTE Co-Generation & Anor V RCR Energy Pty Ltd & Anor case, without a clearly drafted dispute resolution clause a party may be able to proceed straight to the commencement of Court proceedings rather than complying with the pre-litigation steps set out in the dispute resolution clause.

This ultimately can lead to additional costs and time for the parties in resolving any dispute through the litigation process as opposed to utilising the dispute resolution process already set out within their commercial agreement.

Whilst the Court’s approach to the enforceability of dispute resolution clauses will largely depend on the nature of the dispute, the extent of the clause and whether or not it is intended to operate in the context of the dispute in question, they have provided some guidance for drafting dispute resolution clauses as follows:

  • Avoid making reference to ‘good faith’;
  • The clause must be drafted with requisite certainty – it should include such things as:
  • written notice specifying the nature of the Dispute to the other party or parties to the contract;
  • the procedure of dispute resolution to be adopted;
  • outline a timetable for those steps to take place;
  • identify any mediator or independent third party to assist in the dispute resolution process and how their fees are to be paid.
  • It should provide a remedy for breach.

On this basis, if the contractual dispute resolution clause is sufficiently certain, drafted as a mandatory pre-condition to litigation and the party seeking to enforce the process has complied with the necessary steps, it is likely the Courts will give effect to the contract and enforce the dispute resolution process.

Our team of Commercial Dispute Resolution lawyers are highly experienced and can provide advice and support on any dispute resolution questions or agreements you may need reviewed.

If this blog has raised questions in your mind about your current situation Contact us today on +61 3 9822 8588 or via email to find out how we can help.

I would like to receive Burke Lawyers Newsletters