The recent Victorian Supreme Court decision of WTE Co-Generation & Anor V RCR Energy Pty Ltd & Anor [2013] VSC 314 has held that where a dispute resolution clause is uncertain, it will not be enforceable. As a result, a party may be able to proceed straight to litigation rather than complying with the compulsory pre-litigation steps set out in the dispute resolution clause.#

Facts:

RCR Energy Pty Ltd (“RCR”) (the defendant) was engaged to supply a co-generation facility under the Colaroo Co-Generation Plant Boiler Contract (the “Contract”).  WTE Co-Generation (“WTE”) (the plaintiff) believed RCR had breached the Contract and ultimately issued a notice to terminate the Contract. WTE subsequently commenced court proceedings in relation to the dispute.

Issue:

The Contract contained a dispute resolution clause which was a precondition to litigation. The clause specified 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”. As the meeting of senior executives had not occurred, RCR argued that WTE had not complied with the dispute resolution process prescribed under the Contract and applied for the proceedings to be stayed until that process had been observed.

WTE argued that the clause was uncertain and therefore unenforceable.

Decision:

The judge found that the 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 and as such, lacked the essential terms of a future bargain. The application to stay the proceedings was refused on that basis.

Importantly, the judge identified that for a dispute resolution clause to be enforceable, it should ‘set out the process or model to be employed, and in a manner which does not leave this to further agreement'. The judge identified 11 principles helpful to determining whether a contractual dispute resolution is enforceable. These principles can be read here.

Implications:

A dispute resolution clause which leaves the process or model for dispute resolution ill defined, or the subject of further negotiation and agreement (for example, by stating that the parties are to agree a process for resolving a dispute), will be uncertain and unenforceable. As a result, a party may be able to proceed straight to litigation rather than complying with the pre-litigation steps set out in the dispute resolution clause.