Summary

In the recent decision of Jamac Construction Group Pty Ltd v De Mol Investments Pty Ltd [2014] WASC 273, his Honour Justice Kenneth Martin of the Supreme Court of Western Australia found that a defendant could not be constrained from pursuing legitimate set-offs, counterclaims or defences by an insistence on strict compliance with the processes contemplated in clause 47 ('Dispute Resolution') of AS 2124-1992.

The decision suggests a reluctance by the courts to enforce procedural aspects of a dispute resolution clause that would inhibit a defendant’s right to respond fulsomely to litigation or arbitration brought against it.

Background

The decision in Jamac Construction Group Pty Ltd v De Mol Investments Pty Ltd [2014] WASC 273 concerned an application brought by Jamac Construction Group Pty Ltd (Jamac) to strike-out various paragraphs of De Mol Investments Pty Ltd’s (De Mol) defence and counterclaim in Supreme Court proceedings commenced by Jamac.

In early 2010, De Mol, as principal, engaged Jamac, as head-contractor, to construct a residential development in Mount Lawley. The contract between the parties incorporated the Australian Standard General Conditions of Contract AS 2124-1992.

Supreme Court proceedings were brought against both Jamac and De Mol for damage allegedly caused by the works to a building on adjacent land (the Rodgers litigation).

In mid-2011, the contract between Jamac and De Mol was terminated for frustration.

In 2012, Jamac commenced an arbitration against De Mol under the Commercial Arbitration Act 1985 (WA) (CAA), claiming payments in respect of work done prior to termination. Jamac later applied to the Supreme Court to strike out or permanently stay aspects of De Mol’s defence and counterclaim in the arbitration pursuant to section 47 of the CAA or the court’s inherent jurisdiction on the basis that they presented issues already raised in the Rodgers litigation.

Kenneth Martin J granted a temporary stay of the arbitration pending the resolution of the Rodgers litigation and suggested that fresh proceedings could be commenced in the Supreme Court by Jamac or De Mol and either consolidated or heard together with the Rodgers litigation.1

Jamac commenced the present proceedings against De Mol and, following the exchange of pleadings, applied to have large parts of De Mol’s defence and counterclaim struck out on the basis that De Mol had failed to comply with some of the core dispute resolution prerequisites under clause 47 of AS2124-1992. The relevant sections of De Mol’s defence and counterclaim related to allegations of defective work attributable to Jamac.

Clause 47 of AS 2124-1992

Pursuant to clause 47, before a dispute can be referred to litigation or arbitration, a notice of dispute must be issued to the other party and to the Superintendent under the contract. The other party then has the opportunity to provide a written response to the notice after which the Superintendent is to issue a written decision on the dispute.

Only if the Superintendent fails to issue a decision or a party is dissatisfied with the Superintendent’s decision may the parties refer their dispute to arbitration or litigation, and then only after they have conferred at least once in an attempt to resolve the dispute.

Jamac contended that the procedures in clause 47 were mandatory prerequisites binding both parties and that notice of its allegations should have been issued by De Mol well prior to the parties’ future performance obligations being ended by frustration in 2011.

Since no such notice had been provided, Jamac argued that De Mol was now barred from raising the allegations in the litigation by way of defence, set off or counterclaim and those claims should be struck out.

De Mol denied any failure on its part to comply with clause 47 and contended that, in any event, as Jamac had commenced litigation against it, De Mol must be allowed to defend itself without any restraint on its response and should not be prevented from pleading all legitimately held defences.

The court’s decision

Kenneth Martin J dismissed Jamac’s strike out application, finding that clause 47 did not intrude to thwart, inhibit or delay the setoff, counterclaim or offsetting claims put against Jamac by De Mol.

His Honour confirmed that clause 47 was a valid arbitration agreement and noted that, while the clause was silent as to how the dispute resolution obligations therein were to continue once the future performance of the contract is at an end:

"…the considerable weight of case authority…would strongly suggest that the notice of dispute and conferral obligations will continue to apply – even after a termination".

His Honour referred to the body of prior case authority collected in the Chief Justice’s reasons in the recent Supreme Court of WA decision of Pipeline Services WA Pty Ltd v ATCO Gas Australia Pty Ltd to the effect that an arbitration clause will hold an “ongoing vitality” beyond the termination of the future performance of the underlying agreement.

Notwithstanding the continued operation of clause 47, his Honour found that to require De Mol to give a notice of dispute under clause 47 before being entitled to defend and counterclaim would be “pointless in the extreme” and constitute a “significant triumph of form over substance.” Remarking that the litigation should not be artificially and unnecessarily encumbered, his Honour emphasised that this was particularly so in circumstances where the viability of engaging the Superintendent to evaluate the parties’ dispute, as contemplated by clause 47, was questionable given that the parties contractual obligations had ended in 2011.

His Honour found that once a party has validly commenced arbitration or litigation, it would be surprising, wasteful and unjust to procedurally inhibit the defending party from raising its legitimate defences and offsetting claims. An agreement by contracting parties to such an uncommercial process would require “absolutely explicit” express terms.

Implications

While termination of a contract will not negate the continued operation of an arbitration clause post-contractual frustration, where arbitration or litigation has been properly commenced, the courts may be reluctant to enforce strict compliance with the processes set out in the dispute resolution clause where to do so would inhibit or delay the ability of the defending party to advance legitimate claims by way of set-off, counterclaim or defence.

If the parties wish to enforce strict compliance with these processes once litigation or arbitration is on foot, this should be specifically provided for in their agreement.