The recent Victorian Supreme Court decision in WTE Co-Generation v RCR Energy Pty Ltd(1) gives credence to the proposition that common standard form dispute resolution clauses may be unenforceable for lack of certainty.
WTE Co-Generation entered into a construction contract with RCR Energy Pty Ltd for the supply of a co-generation facility intended to be fired by paper mill residues. On November 11 2011 a show cause notice was issued by WTE to RCR, resulting in WTE taking the remaining works out of RCR's hands.
A further notice to show cause was issued by WTE on March 14 2013, culminating in WTE purporting to terminate the contract and commencing legal proceedings against RCR, without first complying with the dispute resolution clause detailed in the contract.
RCR sought to stay the legal proceedings pending compliance with the dispute resolution clause. In turn, WTE contended that the clause was uncertain and unenforceable, on the basis that Clause 42.2 thereof contained an "agreement to agree", specifically providing that:
"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."
After considering relevant case law – including the Queensland Supreme Court decision in Downer EDI Mining Pty Ltd v Wambo Coal Pty Ltd,(2) which found that proceedings should be stayed to enforce compliance with the dispute resolution clause (unenforceability was contended on the basis of the time requirements in the clause) – Justice Vickery held that Clause 42.2 was unenforceable. He found that for a dispute resolution clause to be valid and enforceable, it was necessary to "set out the process or model to be employed, and in a manner which does not leave this to further agreement". The option to "agree on methods of doing so" required a further agreement.
While RCR contended that a stay would be consistent with the obligations on parties and their legal advisers under the Civil Procedure Act 2010, it appears that this act was not specifically considered in finding that the dispute resolution clause was unenforceable.
The decision has widespread implications due to the breadth of contracts that adopt the wording "meet to attempt to resolve the dispute or to agree on methods of doing so". Such contracts include:
- AS4000 (construction only);
- AS4300 and AS4902 (both design and construction);
- AS4905 (minor works);
- AS4911 (supply of equipment without installation);
- AS4916 (construction management); and
- AS4122 (consultant's agreement).
The decision also casts doubt over the enforceability of arbitration agreements, given that the reference to arbitration is typically contained in Clause 42.2 (or its equivalent), which has been found to be unenforceable.
For further information on this topic please contact Megan Calder or Wayne Harrison at Piper Alderman by telephone (+61 2 9253 9999), fax (+61 2 9253 9900) or email (email@example.com or firstname.lastname@example.org).
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