Contractual Dispute Resolution Clauses

By Louise Cooper

There are a number of good reasons to include a dispute resolution clause in a contract.  Conflict is often an unforeseen and messy business.  If and when it occurs, a clearly drafted dispute resolution clause will be a welcome point of reference to work through the dispute.  It will provide certainty at a time when the last thing the parties need is a sub-dispute about how to go about trying to resolve the dispute.

Cost minimisation is another benefit.  If there is an agreed process, the parties can focus their attention on working through that process as efficiently as possible.  Ideally the dispute resolution process produces an outcome and further cost savings by avoiding the more expensive path of litigation.

A dispute resolution clause can also assist preservation of the parties’ relationship.  Often the parties will want to have a positive ongoing commercial or working relationship.  Without a dispute resolution clause, the parties may not contemplate an alternative dispute resolution process.  Alternatively, they may not be inclined to suggest it at an early stage for fear it might be perceived as a sign of weakness.

Tiered Dispute Resolution Clauses are becoming more common in commercial contracts.  They provide for dispute resolution by way of a series of steps.  The parties progress to the next step if the previous one has not achieved resolution.  For example, the first step might be for company representatives to meet, and if that does not produce an outcome, then they may proceed to mediation, followed by arbitration if necessary.

If drafted carefully a tiered dispute resolution clause can be a commercial and cost-effective dispute resolution mechanism.  If not, then it can provide for unnecessarily complex and expensive layers of dispute resolution requirements and / or a vehicle for a party to exercise tactical delays. 

It is important to ensure that a dispute resolution clause is tailored to suit the parties’ needs.  A broadly worded clause such as one which provides for alternative dispute resolution "if a dispute arises from or in connection with this contract" would mean many kinds of disputes would be referred.  The parties may not want such broad scope.  For example, they may prefer that the dispute resolution clause only apply to disputes arising from breach of contract.  Where there is a technical point of law which needs to be judicially determined, or a scenario where urgent interlocutory relief such as an injunction is envisaged, then the parties may not want a dispute resolution clause to apply. A common express contractual term is to the effect that “Nothing shall prejudice the right of a party to seek injunctive or urgent declaratory relief.”

Dispute Resolution clauses must not seek to oust the jurisdiction of the Courts.  However they can, and often do, effectively provide that the dispute resolution process is a condition precedent to litigation.

The judicial trend is to give effect to dispute resolution clauses provided they are drafted clearly, without ambiguity and with identification of process (WTE Co-Generation & Anor –v- RCR Energy P/L & Anor [2013] VSC 314).  Termination of a contract is not likely to negate the continued operation of a dispute resolution clause unless expressly agreed (Jamac Construction Group Pty Ltd v De Mol Investments Pty Ltd [2014] WASC 273;  Pipeline Services WA Pty Ltd v ATCO Gas Australia Pty Ltd [2014] WASC 10 (S)).  Furthermore, failure to comply with a dispute resolution clause, or with reasonable offers to engage in alternative dispute resolution or enter into settlement negotiations, can ultimately result in adverse costs orders (Haniotis v The Owners Corporation Strata Plan 64915 (No. 2) [2014] NSWDC 39; John Richard Bryant v Hawkesbury Radio Communication Co-operative Society Limited [2014] NSWSC 848).