The power of dispute resolution clauses

In any contractual arrangement there is the possibility that one party will fail to perform an obligation causing a dispute between the parties to arise. It is common for contracts such as these to include a dispute resolution mechanism where, at the time of entering into the contract, the parties agree to follow a certain procedure when a dispute occurs. This may include the dispute being referred to mediation, arbitration or expert determination. Some dispute resolution mechanisms even go as far as prescribing several of these steps.

For example, building and construction contracts frequently contain a dispute resolution mechanism that will stipulate a procedure where parties refer the dispute to an expert for determination. The expert’s decision is generally binding, and the parties will have limited avenues to dispute the determination one it has been made by the expert.

Typically labelled as ‘dispute resolution’ or ‘expert determination’ clauses, these contractual provisions assist parties in avoiding the costs and disruption of litigation and provide them with a greater level of flexibility and control over the process. They are important clauses that have a plethora of individual and public policy benefits, however, when used incorrectly can be detrimental.

At the time of entering into the agreement, it is not unusual for parties to be more concerned with the commercial side of the agreement and the dispute resolution clauses can be overlooked, or not properly understood. In some circumstances, dispute resolution clauses may be unfavourable, or even detrimental, to one or more of the parties and that unfavourability is not identified until it is too late.

Importantly, courts regularly order the stay of proceedings in circumstances where they have been commenced before the parties have adhered to a valid dispute resolution mechanism. It is well established that “parties should be held to their bargain” in relation to any dispute resolution mechanism that they may have agreed to. [1] The Courts will take a liberal approach to interpreting such clauses, meaning that they are inclined to give effect to a well-drafted dispute mechanism and order that the parties are to satisfy the dispute procedure before allowing the usual course of litigation to unfold. [2]

Accordingly, it is important that when drafting contracts, parties are aware of the effect of the proposed dispute resolution clause and what it may realistically entail if a dispute were to arise. Some factors for parties to consider is what the nature of the contract is, the relative bargaining power of the parties, how widely the clause may be interpreted, who is in control of the information and whether a court may be better suited to determining particular matters that are likely to arise.

This article was co-authored by Law Cadet Nikala Speed.

[1] Zeke Services Pty Ltd v Traffic Technologies Ltd [2005] 2 Qd R 563 at [21]

[2] Lepcanfin Pty Ltd v Lepfin Pty Ltd [2020] NSWCA 155

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