Dispute Resolution Disputes
The issue
- Dispute resolution clauses prescribing procedures by which contracting parties have agreed to try to resolve disputes about the meaning and effect of their contracts are always encouraged.
- However, if poorly worded, dispute resolution clauses can themselves become the subject of collateral disputation, adding to the time, cost, and scope of the dispute, and potentially, legal action beyond the substance of the matters that led to the initial dispute. Such disputes can quickly escalate and become intractable, and are counterproductive in the long term because they broaden the dispute between the parties, and distract from the core issues.
- Moreover, as a matter of practice, the Courts admonish litigation concerning the procedures by which contracting parties agreed to follow should a dispute arise, and the Courts are most likely to uphold, and thereby, give commercial business efficacy to those arrangements.
Tesseract International Pty Ltd v Pascale Construction Pty Ltd [2021] SASCA 8
- The issue as to whether dispute resolution clauses were void for uncertainty and consequently unenforceable (and the collateral argument that the parties could not use the agreed processes to resolve the dispute) arose in Tesseract International Pty Ltd v Pascale Construction Pty Ltd [2021] SASCA 8. That litigation was recently determined by the State’s highest Court, the Court of Appeal, following years of litigation and investment of financial resources after the primary dispute arose, and actual work under the contract was completed. The Court, upholding the dispute resolution clauses, commented:
[57] …. this is a good example of a poorly drafted agreement which, nevertheless, is capable of being given a business-like interpretation so as to produce a commercially sensible result.
- This collateral dispute could have been avoided entirely if the parties properly drafted their dispute resolution clauses in consultation with legal professionals.
Why were the dispute resolution clauses problematic?
- The parties entered into a standard form Master Builders Association of South Australia contract, with special conditions for the review of tender documentation and provision of engineering designs for the construction of a Bunnings Warehouse.
- Clauses 20, 21 and 22 of the contract contained dispute clauses prescribing the processes and procedures to be adopted to resolve disputes about the contract.
- Clause 20 (referred to as “conciliation”) provided for, in effect, a process of expert determination, and not the involvement of a conciliator to attempt to assist the parties to reach a negotiated outcome they had to voluntary agree to in order to be binding.
- Clause 21 (referred to as “arbitration”) provided for “arbitration” as traditionally understood, including for determination to be imposed on the parties by an arbitrator according to the Commercial Arbitration Act 2011 (SA).
- Notwithstanding, cl 22 relevantly provided that that decisions of both “conciliators” under cl 21 and “arbitrators” under both cl 21 (“conciliation”) and cl 22 (“arbitration”) would be determinative and binding.
- The argument as to why the dispute resolution clauses created uncertainty and could not be given effect to was two-fold. First, “conciliation” as traditionally understood was inherently contradictory with a process intended to be determinative and binding. Secondly, insofar as “conciliation” in cl 20 was intended to be determinative and binding, it could not be reconciled with cl 21, which provided for “arbitration”.
The Court’s decision
- The Court unanimously agreed the law permitted a liberal interpretation of dispute resolution clauses (given their purpose), and that the parties’ intention by including cl 20 to 22, despite their poor drafting, was tolerably clear. Specifically, the Court held the process in cl 20 (“conciliation”) was determinative and binding subject to cl 21 (“arbitration”), and if the parties were unable to resolve their dispute by “conciliation”, the contract permitted them to have the dispute decided by an “arbitrator”. The Court also ordered Tesseract to pay Pascale’s legal fees.
Take home messages
- Given the Court’s approach, contracting parties ought to exercise caution before rejecting invitations to participate in procedures prescribed under agreed dispute resolution clauses rather than investing the time and cost in challenging them on the basis they are “void for uncertainty”, and, more importantly, seek professional advice on contracts before entering into same.
- It follows there is commercial value investing resources into ensuring the documents record the parties’ agreement to minimise the legal and financial risk of exposure of becoming embroiled in a collateral dispute with the other side.