Litigants beware: the importance of complying with prescribed dispute resolution processes in commercial contacts

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Jumping headfirst into litigation is often a costly and timewasting exercise, especially if parties bypass the dispute resolution clauses contained in their contract.

Alternative dispute resolution clauses

In the event a contractual dispute arises, it is common for commercial contracts to prescribe an alternative dispute resolution procedure to be followed before litigation is commenced.

A range of processes may be provided for in these clauses, including determination of the dispute by a third party, such as a binding expert evaluation or third party certification, or,  an obligation that the parties attempt to resolve the dispute by way of negotiation or mediation before going to litigation.

Despite parties consensually agreeing to these procedures when entering into a contract, meaning that they can form part of the contract terms and be just as enforceable as the rest of the contract, when problems arise, they often get ignored. Ignoring dispute resolution clauses can carry the same implications as ignoring any other obligation under the contract, and you can be liable for breach of contract for doing so. Furthermore, it is not uncommon for a dispute to arise in relation to the substance of a contract, the dispute resolution procedure gets ignored (normally by a party prematurely commencing a legal proceedings), leading to another dispute about following the dispute resolution procedure which needs to be resolved (generally by a court stepping in to stay proceedings prematurely commenced on the basis that the party commenced them without complying with the dispute resolution procedure) before the parties can even start working on resolving the initial substantive problem. Talk about costly and timewasting.

When dispute resolution clauses need to be followed

Whilst it is prudent to always follow the dispute resolution clauses contained in your contract to ensure that you avoid the situation just described, sometimes the procedure they set out is more advisory than obligatory. In this case, the court will not have power to intervene if the procedure has not been followed.

Whether the dispute resolution clauses are advisory or obligatory will depend on the particular clauses is question. Specifically, it will depend on whether:

  • the clause is mandatory or non-mandatory. Whilst mandatory clauses will prescribe the dispute resolution process as being a pre-condition to commencing/ continuing court proceedings, non-mandatory clauses only apply when one party elects to adopt the process. A court does not have the power to stay proceedings where a dispute resolution clause is non-mandatory;
  • the clause is a “bare agreement to negotiate” or prescribes a specific procedure or structure to be followed. A clause that simply obligates the parties to “negotiate” is uncertain and will be unenforceable. However, where a clause describes the steps parties must take in a dispute resolution process, the clause will be sufficiently certain and enforceable; and
  • the scope of the clause requires all disputes arising out of the contract to be first determined by the dispute resolution process. If the clause is narrower in scope, certain controversies may be capable of being determined by a court and a stay of proceedings will not be granted.

The court’s discretion to grant a stay of proceedings is a wide one, and whilst certain countervailing factors that may lead a court to conclude that a stay of proceedings should not be granted in a particular case, the starting point for a court in making this consideration will be that the parties “should be held to their bargain to resolve their dispute in the agreed manner”.[1]

Key Takeaways

  • Before commencing a legal proceeding that arises from a dispute pursuant to a commercial contract, it is important to review the contract to determine if a dispute resolution clause exists.
  • Whilst the discretion of a court to grant a stay of proceedings is a broad one, the starting point is for a court to hold the parties to their bargain and their agreement to resolve their dispute in a prescribed manner.
  • A court will not grant a stay of proceedings where a dispute resolution clause is non-mandatory. Wording such as “certain disputes may be determined by an expert” versus “certain disputes must be determined to an expert” demonstrate the difference between mandatory and non-mandatory clauses.
  • Depending on the scope of a dispute resolution clause, it may be that all disputes arising under an agreement, or only some controversies, must be determined by the dispute resolution procedure. Wording such as “any dispute in relation to this agreement” is an example of a broad clause.
  • If a dispute resolution clause is considered to be a bare agreement to negotiate, it will be unenforceable. Alternatively, if a clause sets out a process or certain steps to be followed with a degree of precision, it is more likely that the clause will be deemed enforceable.

[1] Mineral Resources Ltd v Pilbara Minerals Ltd [2016] WASC 338, [54] citing Chesterman J in Zeke Services Pty Ltd v Traffic Technologies Ltd [2005] QSC 135; (2005) 2 Qd R 563 [19] – [22].

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