In recent years, dispute resolution clauses providing for the resolution of commercial disputes by arbitration, expert determination or some combination of the two have become increasingly popular. However, contracting parties often fail to give these ‘midnight clauses’1 due attention, resulting in unwelcome ambiguity or inconsistencies.

The Supreme Court of Victoria was recently called upon to interpret contractual dispute resolution provisions providing for both expert determination and arbitration in Biosciences Research Centre Pty Ltd v Plenary Research Pty Ltd [2012] VSC 249. This decision serves as a timely reminder of the importance of ensuring that dispute resolution provisions are carefully drafted and accurately reflect the intention of the parties.

Background

Plenary Research Pty Ltd (Plenary) entered into a contract (Contract) with Biosciences Research Centre Pty Ltd (Biosciences) under which Plenary agreed to design, construct and operate a biosciences research facility at the Bundoora Campus of Latrobe University in Victoria (the Project).

Various disputes arose between the parties including Biosciences’ rejection of Plenary’s claims for extensions of time (EOT claims). Plenary issued a Notice of Dispute disputing those rejections (Dispute).

The issue for determination by the Court was whether the Contract required the Dispute to be determined by expert determination or arbitration.

The Contract relevantly provided as follows (underlining added):

26.16 Extension of time disputes

… any dispute about an extension of time claim or acceleration under this Clause 26, including a determination or rejection of an extension by the Project Director… may be referred by either party for resolution by an Independent Expert in accordance with the Accelerated Dispute Resolution Procedures, and in making a determination, the Independent Expert must be instructed to have regard to the Change Compensation Principles and this Clause 26.

50. Dispute Resolution

50.1 Disputes

If any dispute arises between the parties in respect of any fact, matter or thing arising out of, or in any way in connection with the Project, the Facility, the Designated Commercial Areas, the Site or this Agreement (Dispute) then the Dispute will be resolved in accordance with Clauses 50 to 53.

50.2 Notice of Dispute

If there is a Dispute, then a party may deliver to the other party a Notice of Dispute …

51. Senior Negotiations

(a) … where a Notice of Dispute and submissions have been delivered under clause 50.2, then [the parties] will meet and attempt in good faith to resolve the Dispute within 5 Business Days of the delivery of the Notice of Dispute under Clause 50.2.

(b) If the meeting required by paragraph (a) does not occur or having occurred fails to resolve the Dispute, then [the parties] … will meet and attempt in good faith, within 10 Business Days of the delivery of the Notice of Dispute under Clause 50.2, to:

(iii) resolve the Dispute; or

(iv) agree that the Dispute be referred to either an Independent Expert under Clause 52 or to arbitration under Clause 53.

(c) If the meeting required by paragraph (b):

(i) does not occur; or

(ii) having occurred fails to resolve the Dispute or to agree on whether the Dispute should be referred to an Independent Expert or an arbitrator, within 30 days of the delivery of the Notice of Dispute, the Dispute shall be referred to arbitration under Clause 53 …

52. Accelerated Dispute Resolution Procedures

(a) (Agreement) …

(i) if this Agreement expressly provides that a Dispute shall be referred for determination by an Independent Expert or by Accelerated Dispute Resolution then Clause 51 shall not apply and within 5 Business Days of the delivery of the Notice of Dispute the parties shall agree on an Independent Expert to determine the Dispute …

Plenary argued that clauses 50 to 53 of the Contract constituted an exclusive regime for the resolution of disputes by arbitration in the absence of agreement between the parties to resolve their disputes by expert determination. In support of its position, Plenary focused on the use of the term ‘may’ (in comparison with ‘shall’ or ‘must’) in clause 26.16 which, in its view, did not trigger clause 52 and entitle one party to unilaterally refer a dispute to expert determination. Conversely, Biosciences contended that it had exercised its right under clause 26.16 to refer the Dispute to expert determination for resolution under the Accelerated Dispute Resolution Procedures which, in its view, provided either party with the unilateral right to refer disputes about EOT claims to expert determination.

Biosciences applied to the Victorian Supreme Court for a declaration that the Dispute be resolved by an independent expert.

Decision

The Honourable Justice Croft found in favour of Biosciences. His Honour observed that in construing the Contract, the Court was required to ascertain the objective intention of the parties from the Contract itself. Justice Croft agreed with Biosciences' contention that Plenary’s interpretation of the Contract would effectively render clause 26.16 as ‘… mere surplusage … in effect, simply crossing it out of the Agreement.’ This approach would not only offend the primary cannon of contractual construction that the courts should prefer the construction of a document which gives work to all the provisions of that document, but also failed to give business efficacy to the provisions of the Contract. Justice Croft also noted that the use of the word ‘may’ in clause 26.16 did not render the operation of the whole of the provision ‘permissive’ rather than mandatory but merely recognised that either party had the option to refer appropriate disputes to expert determination.

The Court also rejected Plenary’s various alternative arguments including that the expert would not have authority to resolve substantive issues associated with the EOT claims. In rejecting this argument, His Honour referred to the benefits of expert determination as a method of dispute resolution and agreed that it would be preferable to take a ‘… positive and expansive approach to expert determination as a form of alternative dispute resolution and, in the circumstances of this case …’. Further, the Court noted that even if it were the case that certain matters fell outside the expert’s jurisdiction, this would not prevent matters being referred to the independent expert for resolution in accordance with clause 52.

Conclusion

The Court issued a declaration that clause 26.16 of the Contract requires that the Dispute be resolved by an independent expert in accordance with the Accelerated Dispute Resolution Procedures (subject to the extent of jurisdiction of the independent expert).

At the time of writing, we understand that an appeal is currently on foot and we therefore await this decision with interest.

What this decision means for you

This decision again highlights the importance of ensuring that dispute resolution provisions are carefully drafted and accurately reflect the intention of the parties. As demonstrated by this case, any perceived ambiguity may give rise to costly and time-consuming litigation regarding the dispute resolution clause itself. This not only delays resolution of the substantive issues in dispute between the parties, but also exposes the existence of the dispute to the public in circumstances where the parties may have preferred that this remain confidential.

In addition, while each case will need to be considered on its merits having regard to the particular wording of the contract in question, this case also serves as a useful reminder regarding the approach that the Courts will generally adopt to matters of contractual interpretation, preferring to avoid a narrow and semantic analysis in favour of a ‘whole of Contract’ approach that seeks to give effect to all provisions. In particular, this decision confirms that the use of the term ‘may’ will not always be read in strictly ‘permissive’ terms and can instead give rise to a mandatory process for dispute resolution in appropriate circumstances, having regard to the wording of the contract as a whole.

Finally, this case demonstrates clear judicial support for expert determination as a method of dispute resolution. In circumstances where arbitration has, in recent years, on occasion been criticised as being too formal, lengthy and costly, this development is likely to be welcomed by commercial parties who have embraced expert determination as a method for resolving their commercial disputes.2