Resolutions to Dispute Resolution Clauses – Avoiding slow, expensive dispute resolution clauses

In the leading Australian case Inghams Enterprises Pty Ltd v Hannigan [2020] NSWCA 82 (Inghams) the Court of Appeal considered Dispute Resolution and the importance of ‘details’ in the drafting of contract dispute resolution clauses. Proper drafting of dispute resolution clauses allows parties to specify how their disputes will be resolved without ambiguities. Clarity and conciseness can aid in avoiding either a slow and expensive dispute resolution process or slow and expensive litigation over the enforceability of the clause itself as seen in the Ingham case.  Unsuitable clauses can add considerable expense and delay when disputes arise.

 What is a dispute resolution clause?

Dispute resolution clauses are common inclusions in most contracts, in particular commercial contracts, and require a contracting party to seek a specific method of dispute resolution in the face of a dispute. It may go without saying, that even in commercial realms, often a clause such as this is not read by the contracting parties. However, it is the first point of reference for lawyers involved in remedying a dispute on behalf of a client. A dispute resolution clause is likely to be binding and has significant impact in how the outcome of a dispute is reached.

In Ingham’s the following was said in relation to dispute clauses:

Dispute resolution clauses may be short form or far more elaborate… They may provide for arbitration: …. They may be standard form: …. They may be bespoke: …. They may be exclusive or non-exclusive…. They may be asymmetric: …. They may be optional: …. They may and often will be coupled with choice of law clauses…. They may be multitiered, providing first for a process of mediation, whether informal or formal, or informal and then formal, before providing for arbitral or judicial dispute resolution….

Dispute resolution clauses can also be known by various other names such as jurisdiction clauses, arbitration clauses or mediation.

What to consider when drafting a dispute resolution clause?

In Inghams the Court confirmed that the clause is to be determined by way of construction. It is therefore appropriate to identify the principle to the construction of a dispute resolution clause. 
           
The starting point is determining the wants and intentions of the parties in the contract and thus the clauses.1 

The clause must be construed by reference to the language and circumstances of the parties with consideration of purposes and objects to be secured by the contract.

Axiomatically a clause in any given contract must not be construed in isolation, but as part of the contract as whole.2

Background

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. Inghams refused to supply chicks for growing to Mr Hannigan, who maintained in response that the Agreement was still on foot.3

Mediation between the parties was unsuccessful and subsequently Mr Hannnigan sought to have his claim referred to arbitration pursuant to the dispute clause of the Agreement, but Inghams resisted.4

At first instance, the primary judge held that the claim for damages fell within the scope of the arbitration sub-clause and, accordingly, declined to restrain the commencement or continuation of the arbitration and dismissed Inghams’ proceedings: [2019] NSWSC 1186.  

The Decision

An application for leave to appeal was sought from the decision from the primary judgement. 

Two main issues arose:

  • whether the primary judge erred in finding that the notified dispute between the parties must be referred to arbitration, pursuant to cl 23.6 of the Agreement (the Construction issue); and 5
  • whether the primary judge erred in not finding that Mr Hannigan had waived his right to refer the dispute to arbitration pursuant to cl 23.6 of the Agreement (the waiver issue).6

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

In regard 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. Therefore, the Court held that the dispute did not fall within the clause and was not one which could be submitted to arbitration. Bell P dissented and stated the importance of detail in a clause and that the use of the word “any” provides a wide scope for the clause to be determined. 

Courts' Position

Courts are reluctant to intervene in disputes arising from contractual agreements when the parties have not extinguished their responsibilities under a dispute resolution clause. The court is likely to stay proceedings pending the outcome of such contractual processes, even if those processes are cumbersome. Essentially the court will attempt to hold parties to their contracts.7

However, subsequently, when courts are involved due to the failure of an agreement being reached, the court will attempt to give effect to the ‘parties’ choices’ and they do not interfere with parties ‘freedom’ in the intentions of the contract.8

Lavan Comment

This is another instance of the court reinforcing the importance of ‘details’ in the drafting of dispute resolution clauses in contracts. Ingams provides a reminder for parties to be aware of dispute resolution clauses in agreements as they will inevitably affect a dispute outcome.  Dispute resolution provisions will be given their proper meaning, even if that meaning is not really the best way to resolve the dispute at hand. Any party trying to ignore the clause is likely to find those efforts will do so at their peril.

If you have any queries in relation to this article please contact The Litigation and Dispute resolution team at Lavan.  

AUTHOR
Iain Freeman
Partner
AUTHOR
Cinzia Donald
Partner
SERVICES
Corporate Disputes and Investigations
Litigation and Dispute Resolution


FOOTNOTES

[1] Inghams Enterprises Pty Ltd v Hannigan [2020] NSWCA 82, [53].

[2] Australian Broadcasting Commission v Australasian Performing Right Association Ltd (1973) 129 CLR 99, 109; [1973] HCA 36; Wilkie v Gordian Runoff Ltd (2005) 221 CLR 522; [2005] HCA 17, [16]; Mastrobuono v Shearson Lehman Hutton Inc. 514 U.S. 52 (1995).

[3] Above n 1, [20].

[4] Inghams Enterprises Pty Ltd v Hannigan [2020] NSWCA, [21].

[5] Ibid, 37.

[6] Ibid, 42.

[7] Racecourse Betting Control Board v Secretary for Air [1944] Ch 114, 126.

[8] Inghams Enterprises Pty Ltd v Hannigan [2020] NSWCA 82, [64].