Are dispute resolution clauses legally binding in commercial agreements?

Do your commercial agreements provide a process for the parties to resolve a dispute that may arise? Dispute resolution clauses are often dismissed by parties as ‘standard wording’, contained at the end of an agreement and unlikely to be required (when the relationship between parties is at that stage, positive) but these clauses can have a significant impact on how a dispute may be resolved.

When a dispute arises, this is the first clause that should be reviewed and so care should be taken by parties in considering these terms before entering into a commercial agreement.

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

WTE Co-Generation & Anor V RCR Energy Pty Ltd & Anor [2013] held that where a dispute resolution clause is uncertain, it will not be enforceable.

The case explored the issue of the 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 Court proceedings to be stayed until the dispute resolution process had been observed.

WTE argued that the clause was uncertain and so unenforceable.

The judge found in WTE’s favour in that the clause 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 wasuncertain. In particular, the cCourt 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 Court proceedings was refused on that basis and the proceeding continued.

Implications of an unclear dispute resolution clause

As occurred in WTE Co-Generation & Anor V RCR Energy Pty Ltd & Anor, 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 may 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 a 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, courts have provided some guidance when 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; and
    • 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 contract’s 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 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.

Contact us today on +61 3 9822 8588 or via email to find out how we can help.

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