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Disputes over dispute resolution clauses – how to avoid ‘commercial nonsense’

15 September 2020

#Dispute Resolution & Litigation, #Corporate & Commercial Law

Published by:

Ushna Bashir

Disputes over dispute resolution clauses – how to avoid ‘commercial nonsense’

Contracts routinely contain dispute resolution clauses in which the parties record their binding preferences for the resolution of disputes. This may include referral to a particular court, or arbitration, mediation or expert determination. It may include several steps – negotiation, followed by mediation, followed by referral to court or arbitration and/or an expert.

It is not uncommon, and is perhaps understandable, that when negotiating a contract the parties tend to focus on the commercial opportunities rather than what will happen if things go wrong.

When drafting a contract, it is tempting to adopt the boilerplate dispute resolution clause at hand. However, a poorly drafted clause will do little to solve issues and may actually become the cause of further time consuming and costly dispute.

This has been demonstrated in a series of cases recently determined by the NSW Supreme Court of Appeal where the terms of dispute resolution clauses themselves were the subject of dispute. The cases demonstrate, as President Andrew Bell acknowledged, that:

“Dispute resolution clauses may be crafted and drafted in an almost infinite variety of ways and styles…and are just as capable of generating litigation as any other contractual clause.”

Unfortunately, parties to commercial contracts often do not pre-empt this and do not pay enough attention to the dispute resolution clauses in their agreements, leading to, as Bell P references, “commercial nonsense”. How does one avoid such commercial nonsense? A study of recent court decisions provides guidance.

Exclusive jurisdiction clauses – Australian Health & Nutrition Association Ltd v Hive Marketing Group Pty Ltd [2019] NSWCA 61

The facts of this case are as follows:

  • Australian Health & Nutrition Association Ltd (Sanitarium) and Rebel Sport Ltd (Rebel) conducted a promotion where purchasers of Sanitarium products could obtain gift vouchers for redemption at Rebel Sports stores
  • Sanitarium entered into a Risk Transfer Agreement (RTA) with Emirat Ltd (Emirat) and Hive Marketing Group Pty Ltd (Hive). Hive was the local agent for Emirat. This agreement was governed by English law and contained an English exclusive jurisdiction clause
  • Rebel and Sanitarium entered into a separate agreement (Promotion Agreement) with Hive. This agreement was governed by NSW law and contained a non-exclusive jurisdiction clause for the courts of NSW
  • a dispute in relation to the reimbursement of Rebel gave rise to proceedings in the Supreme Court of NSW in which Sanitarium and Rebel brought action against Hive and Emirat
  • Emirat, being outside the jurisdiction, successfully sought the stay or dismissal of the proceedings against it and the setting aside of service on it under rule 12.11 of the Uniform Civil Procedure Rules (UCPR). This left the proceedings on foot solely against Hive.

Sanitarium and Rebel were granted leave to appeal the decision. The question before the Court was whether the exclusive jurisdiction clause should be enforced in circumstances where not all parties to the current proceeding were parties to the clause.

Bell P noted that there was high desirability that all aspects of a dispute should be resolved in the one place to ensure tidiness and most importantly, to minimise the possibility of different courts reaching different decisions on the same issue – a consequence that could undermine confidence in the rule of law.

Ultimately, the Court ruled that the importance of holding parties to their bargain, even if not all parties were privy to such a bargain, outweighed the risk of a multiplicity of proceedings. Bell P stated that whilst Rebel was not a party to the exclusive jurisdiction clause, it must have at least been aware of it and that the proceedings were rightfully stayed.

Arbitration – Inghams Enterprises Pty Limited v Hannigan [2020] NSWCA 82

The facts of this case are as follows:

  • Inghams Enterprises Pty Ltd (Inghams) was engaged in a chicken growing agreement (Agreement) with Mr Francis Gregory Hannigan (Mr Hannigan) and purported to terminate this agreement
  • Mr Hannigan commenced proceedings declaring that the purported termination was wrongful. After succeeding, he issued a Notice of Dispute seeking damages for loss of profit based on Inghams’ failure to supply chicken
  • a mediation was unsuccessfully undertaken, after which Mr Hannigan attempted to refer the matter to arbitration. Clause 23 of the Agreement made provisions for arbitration for disputes which “concern any monetary amount payable and/or owed by either party to the other under this Agreement…”
  • Inghams commenced proceedings in the Supreme Court to restrain the referral to arbitration, seeking declarations that Mr Hannigan’s claim did not fall within clause 23 of the Agreement and even if it did, Mr Hannigan waived the entitlement to arbitration because of his commencement of proceedings against the termination
  • the primary judge found in Mr Hannigan’s favour and Inghams sought leave to appeal the decision.

As to the waiver issue, the Court held that Mr Hannigan had not waived his rights to arbitration.

As to the construction issue, the bench was divided. Meagher and Gleeson JJA held that the claim for unliquidated damages was not a claim for an amount payable or owed under any express or implied terms of the Agreement, instead, it arose from common law principles. Thus, the Court held that the dispute did not fall within the clause and was not one which could be submitted to arbitration.

However, Bell P stated that a liberal approach should be applied towards the construction of the dispute resolution clause. The entire clause should be interpreted in light of the context of the agreement. Thus, Bell P found terms, such as “any”, indicated that the parties intended for the clause to have a wide scope. Further, he asserted that a secondary obligation to pay damages arises from or under the contract just as much as a primary obligation and consequently found that the claim for unliquidated damages fell within the ambit of clause 23.

Expert determination – Lepcanfin Pty Ltd v Lepfin Pty Ltd [2020] NSWCA 155

The facts of this case are as follows:

  • under a Development Deed (Deed), Lepcon Pty Ltd (Lepcon) was required to make payments to Lepfin Pty Ltd (Lepfin) in the sum of $3.9 million, yet only paid half this amount
  • clause 12.4 of the Deed provided that a facilitation fee payable to Lepcanfin Pty Ltd (Lepcanfin), the financier of the project, was to be increased by the amount of the shortfall in payments (Top-up) to Lepfin.
  • the Deed also made provisions for various parties to it to enter into guarantees (Guarantees), the execution of which was a pre-condition to the Deed coming into effect
  • the parties later entered into amendment deeds under which Lepcanfin waived the existing defaults of the parties
  • a dispute arose between the parties as to whether by agreeing to waive the existing defaults, Lepcanfin had also waived its entitlement to receive the Top-up
  • the parties appointed an independent expert (Expert) pursuant to a dispute resolution clause in the Deed and signed a tri-partite expert determination agreement (EDA) describing the dispute. However, in their points of claim, Lepcon claimed that the Top-up was void and unenforceable as a penalty. Lepcanfin contended that only the disputes as defined in the EDA should be considered by the Expert
  • The Expert determined that Lepcanfin had not waived its right to the Top-up payments, but that the payments were a penalty and therefore void or wholly unenforceable. She also determined that the proceedings in relation to the Guarantees should be stayed as these claims for relief arose out of the Deed.
  • Lepcanfin commenced proceedings alleging the Expert had exceeded her mandate in determining the penalty issue and made an error in staying the proceedings in relation to the Guarantees. The primary judge dismissed both arguments and Lepcanfin sought leave to appeal.

Lepcanfin’s leave to appeal the Guarantee issue was refused. The Court held that the claims for relief arose out of the Deed and the parties should be held to their bargain.

Leave to appeal the question of the mandate was granted but the appeal was ultimately dismissed. Bell P stated that the expert determination clause should be interpreted broadly as seeking to have all aspects of the commercial arrangements resolved by expert determination. This included removing the right of a party to enjoy the benefit of a contractual provision where it is properly characterised as a penalty. The EDA was also said to be a brief description of the subject matter of dispute, rather than a limitation on the matters to be determined. Thus, the Court found that the Expert had clearly acted within her mandate in resolving the penalty issue.

This case was a clear example, as Bell P stated (citing The Illawarra Community Housing Trust Limited v MP Park Lane Pty Ltd [2020] NSWSC 751) that an expert determination clause will not oust the jurisdiction of the court. Even a well-drafted dispute resolution clause may become the subject of dispute.

Lessons learned – think ‘ART’

These decisions serve as reminders to parties to familiarise themselves with dispute resolution clauses both in agreements that they are party to, and also potentially those they are not party to but which may still affect their interests.

As a helpful reminder, parties should consider A-R-T when looking at dispute clauses

Is the clause:

  • Appropriate? A simple contract may only need a simple clause, but more complex contracts (for extended periods, for example) may warrant more complex clauses. Is some form of alternative dispute resolution (mediation, arbitration or expert determination) appropriate?
  • Relevant. A ‘boiler-plate’ clause may be a convenient starting point, but dispute clauses can be past their use-by-dates. In particular, arbitration institutions and appointing entities can merge or change names, policies and procedures. If you’re a sub-contractor, the disputes clause in the head contract may also be relevant to you. If there is scope for a multiplicity of disputes under one transaction, it might be beneficial if they could all be resolved in the same place
  • Timely. Time limits for steps can be relevant, particularly where there is a cascading clause – for example, negotiation, then mediation, then arbitration or litigation). How much time should be allowed for each step, without the process becoming protracted and over-complicated?

Authors: Geoff Farnsworth & Ushna Bashir

Disclaimer
The information in this publication is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavour to provide accurate and timely information, we do not guarantee that the information in this newsletter is accurate at the date it is received or that it will continue to be accurate in the future.

Published by:

Ushna Bashir

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