Two recent cases have highlighted the impact of a failure to follow a contractually agreed
dispute resolution clause. In Douglas Harper -v- Interchange Group Ltd, the court gave a clear
warning that such a failure could lead to a claim being barred by the courts. In contrast to the
serious consequence in Douglas Harper, in Sunrock Aircraft Corporation -v- Scandanavian
Airlines System Denmark-Norway-Sweden
, the court showed that although, in theory, damages
are available for breach of a dispute resolution clause, in practice the damages may be nominal.

DOUGLAS HARPER -V- INTERCHANGE GROUP LTD

In April 2006, the claimant sold his computer software business to the defendant. Under the
sale agreement, the claimant was entitled to receive commission on specified transactions. The
sale agreement set out how commission should be finalised and paid. It also contained a
provision for expert determination if the commission payments could not be agreed. Expert
determination is a binding method of resolving disputes usually relating to technical or valuation
issues. It may be specifically provided for in contracts as part of a dispute resolution clause.
The defendant provided monthly commission statements between June 1996 and 1999. On
several occasions the claimant made general comments and queries about the statements
received. In May 1997, the claimant wrote to the defendant alleging that he was being
underpaid commission on certain transactions. The defendant responded that any dispute
should be dealt with using the mechanism prescribed in the sale agreement. In 2002, the
claimant's solicitors wrote to the defendant with draft particulars of claim which sought to
recover commission on certain contracts at a higher rate than set out in the commission
statements. In 2005, the claimant issued court proceedings (rather than invoking the contractual
dispute resolution procedure) claiming, amongst other things, a higher rate of commission on
certain transactions.

The judge held that on the construction of the contract, the claimant was not entitled to
commission at the higher rate. Importantly, the judge also held that the claimant was precluded
from recovering the sums claimed in any event, because he had failed to invoke the contractual
dispute resolution mechanism. He held that the general comments and queries made by the
claimant at various times did not satisfy the mechanism, nor did the issue raised in May 1997 as
it was not related to a particular commission statement. Having failed to invoke the contractual
dispute mechanism, the claimant was not now entitled to pursue the claims for commission.

SUNROCK AIRCRAFT CORPORATION -V- SCANDANAVIAN AIRLINES SYSTEM
DENMARK-NORWAY-SWEDEN

In this case, the parties had entered into a sale and leaseback agreement for two aircraft. The
lease contained a term that disputes about certain matters would be resolved by expert
determination. A dispute arose under the lease on the issue of repairs and redelivery of the
aircraft. Contractually the matter should have been referred to an expert but the defendant
refused to appoint an expert.

At first instance, the claimant successfully argued that the measure of damages for breach of
the dispute resolution clause was the cost of repairs to the aircraft on the basis that this is what
the expert would have awarded had an expert determination proceeded. The Court of Appeal
however saw that this could only have been the measure of damages had the expert been
wrong in law. The Court of Appeal held that it was to be assumed that the expert would
determine the matter in accordance with the law and would not have awarded any damages.
The claimant was awarded only nominal damages for the defendant's breach of the expert
determination clause.

COMMERCIAL SIGNIFICANCE

These cases highlight the importance of understanding the dispute resolution clauses in your
contracts and the potential consequence of not following the clause. While damages for failure
to follow such a clause may be nominal, the Douglas Harper case shows that the consequences
could in fact be serious. When including such clauses in a contract you should:

  • consider whether any contractual limitation period provides a realistic timetable for you to
    raise a dispute;
  • ensure that you fully understand the implications of agreeing to a prescribed method of
    alternative dispute resolution.