June 2013

The Victorian Supreme Court decision of WTE Co-Generation & Anor V RCR Energy Pty Ltd & Anor held that the dispute resolution clause in many standard construction contracts is uncertain and unenforceable.

Background

WTE Co-Generation (WTE) contracted with RCR Energy Pty Ltd (RCR) for the supply of a co-generation facility. WTE claimed RCR had breached the contract, issued a notice to terminate and commenced proceedings in relation to the dispute.

The issue

The contract contained a dispute resolution clause that stated:

"Within 7 days after receiving a notice of dispute, the parties shall confer at least in the presence of the Superintendent. In the event the parties have not resolved the dispute 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. All aspects of every such conference except the fact of occurrence shall be privileged.If the dispute has not been resolved within 28 days of service of the notice of dispute, that dispute may be referred to litigation."

There had not been a meeting of senior executives. As a result, RCR argued that WTE had not complied with the dispute resolution process under the contract and that the proceedings should be stayed. WTE argued that the clause was uncertain and unenforceable.

The decision

The judge found that the clause was uncertain and unenforceable because it:

  • required the parties to do one of two things, without prescribing a process to determine which option was to be pursued, and
  • did not prescribe a method of resolving the dispute, as the method for resolving the dispute was dependent on the further agreement of the parties.

The judge identified 11 principles that are helpful in determining if a contractual dispute resolution is enforceable:

  • "The general rule is that equity will not order specific performance of a dispute resolution clause, notwithstanding that it may satisfy the legal requirements necessary for the court to determine that the clause is enforceable. This is because supervision of performance pursuant to the clause would be untenable.
  • The Court may, however, effectively achieve enforcement of a dispute resolution clause by default, by ordering that a proceeding commenced in respect of a dispute subject to the clause, be stayed or adjourned until such time as the process referred to in the clause, is completed. What is enforced by this means is not co-operation and consent of the parties but participation in a process from which consent might come.
  • A circumstance which will operate to preclude the ordering of a stay on this ground arises where the particular dispute resolution clause is determined to be unenforceable, as where for example, the clause is found to be uncertain.
  • Dispute resolution clauses in contracts should be construed robustly to give them commercial effect. The modern approach to the construction of commercial agreements is generally to endeavour to uphold the bargain by eschewing a narrow or pedantic approach in favour of a commercially sensible construction, unless irremediable obscurity or a like fundamental flaw indicates that there is, in fact, no agreement.
  • Honest business people who approach a dispute about an existing contract will often be able to settle it. If business people are prepared in the exercise of their commercial judgment to constrain themselves by reference to express words that are broad and general, but which nevertheless have sensible and ascribable meaning, the task of the court is to give effect to and not to impede such solemn express contractual provisions. Uncertainty of proof does not detract from there being a real obligation with real content.
  • A dispute resolution clause in a contract, consistently with public policy in promoting efficient dispute resolution, especially commercial dispute resolution, requires that, where possible, enforceable content be given to contractual dispute resolution clauses.
  • The trend of recent authority is in favour of construing dispute resolution clauses where possible, in a way that will enable those clauses to work as the parties appear to have intended, and to be relatively slow to declare such provisions void either for uncertainty or as an attempt to oust the jurisdiction of the court.
  • The court does not need to see a set of rules set out in advance by which the agreement, if any, between the parties may in fact be achieved. The process need not be overly structured. However, the process from which consent might come must be sufficiently certain to be enforceable. A contract which leaves the process or model to be utilised for the dispute resolution ill defined, or the subject of further negotiation and agreement, will be uncertain and unenforceable.
  • An agreement to agree to another agreement may be incomplete if it lacks the essential terms of the future bargain.
  • An agreement to negotiate, if viewed as an agreement to behave in a particular way, may be uncertain, but is not incomplete. The relevant question is whether the clause has certain content.
  • An obligation to undertake discussions about a subject in an honest and genuine attempt to reach an identified result is not incomplete."

What this means for agencies

The dispute resolution clause in question is very similar to clauses in standard construction contracts. Accordingly, agencies should review their template documents to determine whether their clauses are at risk of being found unenforceable.