Changing times

The Supreme Court of Victoria has ruled that a dispute resolution clause which is commonly used in Australian Standard forms of construction contracts is uncertain, unenforceable, and contains an agreement to agree.

The clause in question includes a requirement to “meet to attempt to resolve the dispute or to agree on methods of doing so” before the dispute is referred to arbitration, mediation, or litigation. The Court found the requirement is uncertain as to which of the two processes the parties are required to pursue, and does not specify any methods of resolving the dispute.

This clause is commonly included in some Australian Standard form of contracts such as AS4000-1997 / AS2124-1992 General Conditions of Contract, AS4906-2002 Minor Works Contract, and AS4910-2002 General Conditions of Contract for the Supply of Equipment with Installation.

The case

In WTE Co-Generation v RCR Energy Pty Ltd [2013] VSC 314, the parties had entered a contract for the construction of a co-generation facility at Coolaroo.

A dispute arose under the contract, and WTE issued a show cause notice to RCR. RCR responded but not to WTE’s satisfaction. WTE purported to take all remaining work under the contract out of RCR’s hands.

WTE issued a further show cause notice to RCR, requesting RCR to show cause as to why WTE should not terminate the contract. RCR responded but not to WTE’s satisfaction. WTE issued a notice purporting to terminate the contract.

The dispute resolution clause required a written notice of dispute to be issued, and for the parties to confer at least once within 7 days together with the Superintendent. If the dispute was not resolved, “...then within a further 7 days a senior executive representing each of the parties must meet to attempt to resolve the dispute or to agree on methods of doing so. At every such conference each party shall be represented by a person having authority to agree to such resolution or methods”.

The clause provided that if the dispute had not been resolved within 28 days of service of the notice of dispute, the dispute may be referred to litigation.

WTE commenced proceedings, and RCR applied to the Court to stay the proceedings because no meeting had taken place between the senior executives to attempt to resolve the dispute, and the dispute resolution clause under the contract had not been followed.

WTE argued the clause was not sufficiently certain because the senior executives were required to agree on methods of resolving the dispute.

The Court

The Court affirmed that a contract may validly include an agreement to meet and undertake genuine and good faith negotiations to attempt to resolve a dispute. However, the question here was whether this clause was sufficiently certain.

Justice Vickery found that once the dispute resolution clause was triggered, the parties were required to do one of two things – either to meet together to resolve the dispute, or to agree on methods of doing so. No process was prescribed to determine which option was to be pursued. Further, no method of resolving the dispute was prescribed, and the method was dependent on the parties’ further agreement before it could proceed.

The Court found this amounted to an inherent uncertainty and RCR’s application to stay the proceedings was refused on the basis that the clause was unenforceable.

What this means

This case shows the Court would not interpret the dispute resolution clause in such a way to give effect to the parties’ intention, such as by striking out any uncertain portions.

The clause was found to be unenforceable in its entirety. The Court found it was not for the Court to substitute a mechanism where the parties had failed to agree upon it in the contract, as that would involve the court in contractual drafting, rather than a contractual construction of imprecise terms.