Case note

In the recent Supreme Court of Queensland decision of Santos Ltd v Fluor Australia Pty Ltd [1], Justice Douglas endorsed the courts’ positive approach to giving effect to alternative dispute resolution (ADR) clauses even where one party seeks a litigated outcome.

In this case, Santos contracted Fluor to perform work on its GLNG Project near Gladstone.  Santos became concerned about the amount claimed by Fluor under the contract, which exceeded the budget estimate by over $1.85 billion. 

Due to these cost concerns, Santos purported to exercise a contractual entitlement to view Fluor’s costing records for the project.  Fluor refused the request on the basis that the demand did not fall within the scope of the relevant clause.  Despite an ADR clause in the contract requiring the parties to follow a formal process of negotiation prior to litigation, Santos applied to the court to enforce its entitlement to the records.  

Fluor sought a stay of the enforcement application, contending that the dispute between the parties should be resolved in accordance with the ADR clause in the contract between the parties.

Pursuant to the ADR clause, a dispute could not be litigated without attempts in good faith to resolve it, including by meetings between the parties and their dispute resolution representatives.  

The Court found that the parties should be held to the contract unless the justice of the case favours the grant of a stay of the ADR process.  The Court in the present case cited numerous cases in support of the proposition that a party seeking to subvert an ADR clause bears a heavy onus to prove that there is ‘good ground’ to dispense with the ADR process.  The Court also referenced case law in saying ‘strong cause would have to be shown before a court could be justified in declining to enforce such an agreement’.

Similarly, the Court remarked that there is a very high threshold for an ADR clause not to be enforced. The process would need to be ‘obviously futile’ or a completely hopeless exercise, or the prospect of a productive ADR ‘so slight as not to justify enforcing the agreement’.

When Santos raised the argument that the issue in dispute was based on a confined legal point best suited for court determination, Justice Douglas found that, as a matter of policy, where parties agree to ADR, they do so with a view to reaching a mutually commercially acceptable solution, rather than to obtain a determination on the precise legal rights and obligations of the parties.

Other relevant considerations

Justice Douglas’s decision to enforce the ADR clause was also informed by the public interest in requiring parties to adhere to their bargains and in avoiding the unnecessary use of court time.

His Honour also remarked upon the three-month delay in instituting proceedings from the time at which Santos learned of Fluor’s refusal to deliver the documents.  It was noted that three months would have been a sufficient time for the parties to have fully completed the ADR process.

Finally, it was relevant that enforcement of the ADR clause would not prejudice Santos’ right to a judicial determination of its claim.  The clause provided that, following compliance with the ADR process and absent a resolution, either party could commence litigation of the dispute. 

Partial compliance with an ADR clause is not sufficient

In the alternative to its preferred outcome of a stay of the entire ADR clause, Santos sought to dispense with the early stages of the process, leaving only the provision that the more senior negotiators would meet and, unless a resolution were reached, the dispute could be referred to litigation. This was because, contrary to the provisions of the ADR clause requiring representatives of the parties to meet and attempt to resolve the dispute, the parties had exchanged detailed correspondence in relation to their respective positions on Santos’ entitlement to view Fluor’s costing records.

The Court held that the correspondence was no substitute for the face-to-face meetings required by the early stages of the formal process of negotiation, and declined to dispense with any part of the ADR process.

The Court stayed the proceedings, pending the parties’ compliance with the ADR clause.

Judicial support of ADR

Judicial support is a key feature of Australia’s sophisticated system of ADR.  The courts’ desire to uphold ADR clauses, as demonstrated in the Santos case, provides parties with the certainty that their agreed alternative methods of dispute resolution cannot be dispensed with lightly.