This decision re-iterates the need for careful drafting of dispute resolution clauses in contracts to ensure that they are not void for uncertainty.
Contracting parties commonly wish to avoid litigation, at least until some other dispute resolution process has been completed. To be enforceable, dispute resolution clauses must be drafted so that they prescribe a clear method for resolving disputes and must not leave part of the process ill-defined or to be later agreed by the parties.
This case concerned a contract for the supply by the Defendant, RCR Energy Pty Ltd (“RCR”), the plaintiff, to WTE Co-Generation (“WTE”), of a co-generation facility (a generator of power and useful heat) to be fired by paper mill residues.
WTE believed RCR was in breach of the agreement and issued a notice to terminate the contract and issued proceedings in the Victorian Supreme Court.
The contract contained a dispute resolution clause which stated 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.” (Emphasis added.)
RCR argued that instituting proceedings amounted to a breach of the dispute resolution clause, as no meeting of senior executives had occurred, and therefore the proceedings should be stayed. WTE argued that the clause was uncertain and therefore unenforceable.
Uncertainty of the dispute resolution clause
The judge found that the dispute resolution clause failed to outline which method should be adopted for resolving the dispute and the specifics of that method. For this reason, the clause was deemed to be uncertain. In particular, the court 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, which is unenforceable. WTE’s application to stay the proceedings was therefore refused.
The judge held that:
“as a minimum, what is necessary for a valid and enforceable dispute resolution clause, is to set out the process or model to be employed, and in a manner which does not leave this to further agreement.”
Dispute resolution clause principles
The judge usefully set out a series of 11 established principles in relation to dispute resolution clauses:
- Courts generally do not order specific performance of dispute resolution clauses, as court supervision of performance would be untenable.
- A court may, however, effectively achieve enforcement of a dispute resolution clause by ordering a stay of proceedings until the process in the clause is completed.
- A stay will not be ordered, however, where a dispute resolution clause is determined to be unenforceable, such as where it is found to be uncertain.
- Dispute resolution clauses “should be construed robustly to give them commercial effect”. The court will favour a “commercially sensible” construction rather than a “narrow or pedantic” one.
- While the clauses may be expressed in broad, general terms, so long as there is a sensible and ascribable meaning, the courts will enforce them.
- Consistent with public policy, dispute resolution clauses facilitate the efficient resolution of disputes and therefore courts will endeavour to give them enforceable content.
- The trend of authority favours construing dispute resolution clauses to work as the parties intended and courts will be slow to declare them void for uncertainty or for attempting to oust the courts’ jurisdiction.
- Dispute resolution clauses need not be overly structured; they simply must set out the process or model to be used to resolve the dispute and not leave that process or model ill-defined, or the subject of further negotiation or agreement.
- An agreement to agree to something is incomplete and unenforceable.
- An agreement to negotiate is not incomplete, but if it requires the parties to behave in a particular way it may be uncertain – the question is whether the clause has certain content.
- An obligation to undertake discussions “in an honest and genuine attempt to reach an identified result” is not incomplete.