Australia Mike Hales MinterEllison Perth mike.hales@minterellison.com Law firm bio Co-Chair, IBA Litigation Committee and Conference Quality Officer 1. What are the current challenges to enforcement of multi-tiered dispute resolution clauses? Under Australian law, a contract can only be binding if its terms are sufficiently certain. If a contract is not certain, it will be void. Upper Hunter County District Council v Australian Chilling & Freezing Co (1968) 118 CLR 429; Cheshire and Fifoot's Law of Contract; 9th edition; [6.1]. Certainty is a particularly relevant issue with multi-tiered dispute resolution clauses as they often deal with nebulous concepts such as negotiating in good faith. What can be enforced by the courts is not co-operation and consent, but participation in a process from which co-operation and consent might come. Hooper Bailie Associated Ltd v Natcon Group Pty Ltd (1992) 28 NSWLR 194, 206. It was only in the 1990s that the law on enforceability of multi-tiered dispute resolution clauses in Australia became clear. Prior to that, cases addressing the question did not 'speak clearly or with one voice'. Id., at 204. Giles J observed in Hooper Bailie that opponents of the enforceability of conciliation or mediation clauses contended that it was futile to seek to enforce something that required co-operation and consent; and that there can be no loss to the other party if, for want of co-operation and consent, the consensual process would have led to no result. Proponents of enforceability, however, contended that this approach misunderstood the objectives of alternative means of dispute resolution and that exposure to procedures designed to promote compromise might do just that. Id., at 206. Shortly before the House of Lords held in Walford v Miles [1992] 2 AC 128 that an agreement to negotiate in good faith was unenforceable in the UK (although see comments in Yam Seng Pte Ltd v International Trade Corp Ltd [2013] EWHC 111 (QB) at 694 onwards per Leggatt J.), the New South Wales Court of Appeal decided Coal Cliff Collieries Pty Ltd v Sijehama Pty Ltd (1991) 24 NSWLR 1. Kirby P (as he then was), with Waddell AJA agreeing, found that, in Australia, an agreement to negotiate in good faith could be enforceable in some cases, depending on the terms and construction of the clause. Id., at [26]-[27]. A representation to negotiate in good faith implies that the representor will genuinely enter into negotiations, but it does not include a representation that a party will act otherwise than in its own interests, or a representation that a party will successfully conclude the negotiations, or that they will not 10
consider or pursue alternative arrangements. State Bank of New South Wales v Chia (2000) 50 NSWLR 588 [427] per Einstein J. Kirby P stated that the proper approach to be taken in a particular case would depend upon the construction of the particular contract. His honour explained that in many contracts, the promise to negotiate is intended to be a binding legal obligation to which the parties should be held, for example, where a third party has been given the power to settle ambiguities. Sometimes, the court may be able to flesh out a provision which would otherwise be unacceptably vague by reference to a readily ascertainable external standard. However, in many cases, the promise to negotiate in good faith may occur in the context of an 'arrangement' which by its nature, purpose, context or other provisions makes the promise is too uncertain to be enforceable. Id., at [26-27]. Handley JA, in dissent, held there was 'no identifiable criteria by which the content of the obligation to negotiate in good faith can be determined'. However, it is the majority view of Kirby P and Waddell AJA that has prevailed. See e.g. Carter and Harland 4th edition at [271]. There is a distinction between an agreement to conciliate or mediate and an agreement to agree, and between an agreement to negotiate in good faith and an agreement to mediate or conciliate. Giles J observed in Hooper Bailie that the difficulty may not be that good faith is incapable of certain meaning but that there is a necessary tension between negotiation, where a party may be expected to have regard to self-interest rather than the interests of the other party, and the maintenance of good faith. Id., at 209. This may be why the question of certainty has proved the most difficult hurdle for multi-tiered dispute resolution clauses to overcome. Uncertainty with respect to the process to be followed in the event of a dispute will be fatal to the enforceability of a clause. However, the trend of recent authority is in favour of construing dispute resolution clauses in a way that will enable them to work as the parties appear to have intended, and being slow to declare the provisions void for uncertainty. WTE Co-Generation v RCR Energy Pty Ltd [2013] VSC 314, [39]. In Hooper Bailie the parties had commenced an arbitration but then agreed to participate in a conciliation process. Part way through that process, the defendant broke away and resumed the arbitration. Giles J stayed the arbitration until the conclusion of the conciliation process. In that case, the parties' agreement to attempt conciliation was sufficiently certain to be given legal recognition. Moreover, the defendant had given no explanation for its wish to resume arbitration rather than continue the process of conciliation to its conclusion. In the more recent case of WTE Co-Generation v RCR Energy Pty Ltd [2013] VSC 314, a dispute resolution clause was found to be unenforceable due to uncertainty. There were two reasons for this. The first was that once the operation of the provision was triggered, the parties were required to do one of two things, either meet to resolve the dispute, or agree on methods of doing so. Id., at [42]. No process was prescribed to determine which option was to be pursued. The second reason was that no method of resolving the dispute was specified, so further agreement would be needed before the process could proceed. Id., at [44]. 11
In WTE Co-Generation v RCR Energy Pty Ltd, Vickery J stated that it was a well accepted construction technique for a court to strive to give commercial effect to an imperfectly drafted clause, but the clause must set out a process or model to be employed rather than leaving that to further agreement. It was not for the court to substitute its own dispute resolution mechanism where parties have failed to agree upon it in their contract. To do so would involve the court in contractual drafting rather than contractual construction Id., at [46]. The requirement for certainty does not, however, mean that the process described in the clause must be overly structured. Einstein J noted in Aiton Australia Pty Ltd v Transfield Pty Ltd [1999] NSWSC 996 that 'if specificity beyond essential certainty were required, the dispute resolution procedure may be counter-productive as it may begin to look much like litigation itself'. Id., at [62]. As already noted, the approach taken by courts in enforcing dispute resolution clauses in Australia is consistent with the approach taken by courts to allegations of contractual uncertainty generally, that is, to 'endeavour to uphold the bargain by eschewing a narrow or pedantic approach in favour of a commercially sensible construction, unless irremediable obscurity or a like fundamental flaw indicates that there is, in fact, no agreement'. Robertson v Unique Lifestyle Investments Pty Ltd [2007] VSCA 29, [38]; WTE Co-Generation v RCR Energy Pty Ltd [2013] VSC 314, [26]. Dispute resolution clauses should be construed robustly to give commercial effect. WTE, supra, at [39]. 2. What drafting might increase the chances of enforcement in your jurisdiction? Certainty is of the utmost importance. It is prudent to: 1. avoid clauses which state that the parties should agree on the means of dispute resolution once a dispute has eventuated; 2. avoid agreements to negotiate or discuss and instead, agree to a specific means of dispute resolution; 3. provide for an order in which the tiers of dispute resolution are to be attempted, for example, try x then y, not x or y; 4. ensure that particular stages of the clause are expressed as requirements to be fulfilled before either party can commence proceedings; 5. be as clear as possible about the process that should be followed, for example, who should be involved, how experts should be paid and where the alternative dispute resolution should be conducted; 6. use mandatory language; 7. clearly express the administrative processes for selecting a mediator/arbitrator/conciliator; 8. provide a mechanism for a third party to finalise a choice of mediator/arbitrator/conciliator in the event that parties have a dispute about it; 9. specify consequences for failure to undertake prior stages where possible; and 12
10. provide time limits for each step in the process so that it is not open-ended. 3. If your courts have enforced such clauses, how have they done so? The means of enforcement will vary depending on how the clause has been breached. The most common situation is that one of the parties has commenced either litigation or arbitration prematurely, omitting one or more steps required by the multi-tiered dispute resolution clause. In those circumstances, the clause would usually be enforced by means of a stay of any litigation or arbitration that is on foot. A stay of this nature will not be made unless it is in accordance with fairness. Aiton Australia Pty Ltd v Transfield Pty Ltd (1999) 153 FLR 236, [166]. The general rule is that equity will not order specific performance of a dispute resolution clause, because supervision of performance pursuant to the clause would be untenable. Id., at 26. If a party proceeds with litigation in the face of an enforceable agreement to do otherwise, it may amount to an abuse of process. Id., at 28. Ordering a stay is not a means of enforcing cooperation but enforcing participation in a process from which consent might come. WTE Co- Generation v RCR Energy Pty Ltd [2013] VSC 314, [39]. It is an order which is very close to an order for specific performance, but the courts have been at pains to point out that it is distinct. Cheshire and Fifoot's Law of Contract; 9th edition; [6.17]. The party contesting the stay application bears the practical burden of persuading the court that it should not be held to an apparent agreement to endeavour to settle its dispute with the other party by the agreed dispute resolution process. Elizabeth Bay Developments Pty Ltd v Boral Building Services Pty Ltd (1995) 36 NSWLR 709, 715. In Hooper Bailie Associated Ltd v Natcon Group Pty Ltd 28 NSWLR 194, the plaintiff successfully applied for an order to stay arbitration proceedings until conciliation proceedings were complete. This was on the basis of an agreement between the parties that they would attempt to resolve issues at conciliation before arbitration. The defendant had promised to participate in the conciliation and the conduct required of it was sufficiently certain for its promise to be given legal recognition. An order to stay litigation while alternative dispute resolution is exhausted is discretionary and the court will exercise its discretion against making such an order where it would be futile. Cheshire and Fifoot's Law of Contract; 9th edition; [6.17]. For example, in Aiton Australia Pty Ltd v Transfield Pty Ltd (1999) 153 FLR 236, Einstein J acknowledged that a stay of proceedings could be used to enforce a multi-tiered dispute resolution clause. Id., at [26]-[31], [43]. However, the application for an order staying the proceedings in that case was unsuccessful. This was because strict compliance with a dispute resolution procedure by the party invoking the process was an essential precondition to being entitled to relief by way of enforcing the other party to comply with the procedure. Where both parties have agreed that something should be done which cannot be done unless both concur in doing it, the party seeking to enforce that agreement must do all that is necessary on their part to achieve out the agreed objective. Id., at 172. A further ground on which the clause failed was that the mediation agreement did not address the question of how the payment of the mediator's costs was to be dealt with. The mediation part of 13
the clause was not severable from the rest of the clause, so the entire clause was unenforceable. Id., at 174. The case was decided in 1999. Whether the same outcome would be reached today is open to question. 4. Please give an example of a clause that has been found to be, and remains, enforceable in your jurisdiction. An interesting example arose in United Group Rail Services Ltd v Rail Corporation of New South Wales [2009] NSWCA 177. The court discussed the enforceability of the following dispute resolution clause: [35.11] Negotiation If: a) a notice of appeal is given in accordance with Clause 35.9; or b) the dispute or difference for which the notice under Clause 35.1 has been given does not relate to a Direction of the Principal's Representative under one of the Clauses referred to in Attachment A, the dispute or difference is to be referred to a senior executive of each of the Principal and the Contractor who must: c) meet and undertake genuine and good faith negotiations with a view to resolving the dispute or difference; and d) if they cannot resolve the dispute or difference within fourteen days after the giving of the notice... the matter at issue will be referred to the Australia Dispute Centre for mediation. The parties agreed that clause 35.11(d) was uncertain because the Australian Dispute Centre did not exist but that it could be severed from the remainder of the clause. The appellant asserted that sub clause 35.11(c) was also uncertain. The respondent denied it. The central question in the case, then, was whether clause 35.11(c) was uncertain and therefore unenforceable. The court found that the clause was certain. Allsop P observed that the phrase 'genuine and good faith' is a phrase concerning an obligation to behave in a particular way in the conduct of an essentially self-interested commercial activity: the negotiation of a resolution of a commercial dispute. The phrase requires honesty and genuineness, fidelity to the bargain and to the process of negotiation for the designated process. Id., at [71]. These are not empty obligations but reflect the duty, if the matter were to be litigated, to exercise a degree of cooperation to isolate issues for trial that are genuinely in dispute and to resolve them as speedily and efficiently as possible. Id., at [79]. The effect of this is merely that parties are constrained by the bargain into which they have willingly entered. Id., at [73]. 14