Dispute resolution clauses in commercial contracts often provide a cheaper, faster alternative to litigation and enable the parties to continue with their business relationship. However, as seen in the recent case of WTE Co-Generation v RCR Energy Pty Ltd, a generalised dispute resolution clause which is unenforceable can have the effect of prolonging the resolution of the dispute and result in additional legal costs.
RCR Energy Pty Ltd (RCR Energy) entered into a contract with WTE Co Generation (WTE) and Visy Energy to supply a co-generation facility which was intended to be fired by paper mill residues. WTE alleged that RCR Energy breached the contract pursuant to a novation of the contract whilst Visy Energy was suing for an alleged misleading representation made in the contract. RCR Energy applied to have the proceedings stayed on the basis that the parties had not complied with clause 42, a contractual dispute resolution clause in the contract.
Sub-clause 42.2 of the contract stated ‘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.’ The contract stated litigation was only available if this condition had been complied with. WTE and Visy Energy opposed the application, claiming that the sub-clause was simply an agreement to agree and was uncertain and void, and therefore unenforceable.
Was the clause unenforceable?
The Court found that the sub-clause was uncertain since the parties were required to do one of two things, either meet together to resolve the dispute or to agree on methods of doing so. There was no process prescribed to determine which option was to be pursued. Further, there was no method of resolving the dispute generally and it was dependant on the parties further agreeing on the method to be employed.
Justice Vickery noted that the Court will strive to give commercial effect to an imperfectly drafted contractual clause. His Honour stated that such a clause does not require a set of rules to be set out in advance which directs the parties to how an agreement is to be achieved. However, as a minimum, it is necessary to set out the process or model to be employed without requiring further agreement in order to be a valid dispute resolution clause. Consequently, sub-clause 42.2 was found to be unenforceable and litigation could proceed.
Steps to consider whether your clause is enforceable
Clearly outline the process of dispute resolution to be followed: this may involve using a tiered dispute resolution clause outlining a series of steps in the overall dispute resolution process, whereby each step is to take effect if the previous step proved unsuccessful.
Ensure the dispute resolution process is certain: avoid stages in the process where agreement is needed on some course of action before the process can proceed. If the parties can not agree, this may be considered an ‘agreement to agree’ as seen in the case above and be held unenforceable.
Ensure Set out a mechanism for apportionment of costs: such a clause is imperative since the Court will not imply a term that the parties jointly share the reasonable remuneration of the dispute resolver and consequently, it may be uncertain.
Include a mechanism to determine who will be selected as the dispute resolver: this clause should identify a dispute resolver and, if they become unavailable, a mechanism for a third party to make the selection.
Include time frames: each step in the dispute resolution process should include time frames.
Stipulate that alternative dispute resolution is a condition precedent to litigation: without specifically stipulating this, the clause will be futile and the court will find it ineffective. Care must be taken however not to exclude recourse to the courts.