Australia: The limits of uncertainty – what is the appropriate focus for the review of dispute resolution clauses by Standards Australia?

Lord Upjohn, Wishaw v Stephens [1970] AC 508

In brief - Standards Australia advises that dispute resolution clauses should be reviewed

In WTE Co-generation and Visy Energy Pty Limited v RCR Energy Pty Limited & Anor [2013] VSC 314 (WTE v RCR), the Victorian Supreme Court found that a contractual clause requiring senior executives to meet "to attempt to resolve the dispute or to agree on methods of doing so" amounted to an "agreement to agree", and was unenforceable at law.

The immediate effect of that decision was an alert Australian Standard Conditions of Contract, published by Standards Australia, (quite properly) advising users to seek legal advice before adopting the standard suite of dispute resolution clauses in light of the judgment. The alert foreshadowed an intention on the part of Standards Australia to carry out a review of all dispute resolution clauses used in its suite of contracts.

Our October 2013 article, Dispute resolution clauses in some standard form contracts may be unenforceable, called into question the enforceability of superintendent administered dispute resolution clauses generally. This article focuses instead on the judgment in WTE v RCR and questions whether the case was, in fact, correctly decided.

Interpretation of dispute resolution clauses by courts

For some time, the orthodox approach of courts has been to hold parties to the terms of dispute resolution clauses to which they have agreed and, in doing so, approach the construction of such clauses "liberally and not narrowly".

In this sense, a dispute resolution clause is no different from any other clause in a commercial contract. The usual rules of interpretation apply, including the rules that require a court to:

• give the contract a businesslike interpretation, paying attention to the language used by the parties, the commercial circumstances which the document addresses and the objects which it is intended to secure (see McCann v Switzerland Insurance Australia Limited [2000] HCA 65);
• construe the contract as a whole and give effect to it accordingly (see Chamber Colliery Limited v Twyerould (1893) [1915] 1 Ch 268; Westgate Ports Pty Limited v Port of Melbourne Corporation [2011] VSC 331; and Avranik Pty Limited v Lloyd [2013] VSCA 244); and
• only hold a clause void for uncertainty as a last resort, where it is not possible to give it a reasonable meaning (see Lord Denning MR in Greater London Council v Connolly [1970] 2 QB 100).

Dispute resolution clause in WTE v RCR

The clause that generated the controversy in WTE v RCR states as follows:

Defendant seeks stay of proceedings commenced by plaintiff

In WTE v RCR, one or more disputes arose under the contract, but the nature of the dispute(s) is unclear from the face of the judgment. The defendant, RCR Energy Pty Limited (RCR), sought a stay of proceedings commenced by the plaintiff, WTE Co-Generation (WTE), on the basis that WTE had failed to comply with the procedure set out in the dispute resolution clause prior to commencing litigation.

Plaintiff argues that dispute resolution clause void for want of certainty

This issue was determined as a preliminary matter. WTE argued that the clause was void for want of certainty. The Court agreed, relevantly stating:

Court's interpretation of dispute resolution clause

It is apparent from this reasoning that his Honour has construed the clause as in fact requiring the parties at the meeting contemplated between the senior executives to either resolve the dispute or agree a method for doing so.

His Honour's conclusion that the clause was void for uncertainty rests entirely on the premise that agreement on a method of resolving the dispute was mandatory in the event that the dispute itself could not be resolved at the meeting.

This is because, if it were the case that the parties were only obliged to attempt to agree on a method for resolving the dispute, then there is no reason why, following the decision of the New South Wales Court of Appeal in United Group Rail Services Limited v Rail Corporation New South Wales [2009] NSWCA 177 at [74], (of which his Honour otherwise approved) the court, absent other discretionary considerations, would not hold the parties to their bargain and require them to participate in the meeting as a pre-condition to commencing litigation.

It follows that his Honour construed the clause as meaning:

1. attempt to resolve the dispute; or
2. agree on methods of doing so.

Problems with the court's interpretation

However, respectfully, such an interpretation is problematic for two reasons:

• it leads to the conclusion that the clause is void for uncertainty, whereas there is an alternative available interpretation that means it is not; and
• it fails to give any or sufficient meaning to the final paragraph of the clause, which states: "If the dispute has not been resolved within 28 days of service of the notice of dispute, that dispute may be referred to litigation."

These are discussed in turn below.

Alternative interpretation of dispute resolution clause in WTE v RCR

An interpretation of the clause as meaning (emphasis added):

...the parties must meet to attempt to:

1. resolve the dispute; or
2. agree on methods of doing so

gives effect to the clause as a whole because it means that, absent resolution of the dispute at the senior executives' meeting, the parties would only be required to attempt to agree on methods for resolving the dispute. Such a requirement is not an "agreement to agree" and would not be void for uncertainty (see United Group Rail Services Limited v Rail Corporation New South Wales, referenced above).

It is respectfully submitted that this alternative construction was available and should in fact have been adopted by the court consistently with the principle that a construction that is reasonably available and avoids invalidity on the grounds of uncertainty should be preferred over one that does not (Greater London Council v Connolly, referenced above).

Relevance of the right to refer to litigation

Separately, the final paragraph of the clause may, on one view, be inconsistent with an interpretation of the clause that requires the parties at the senior executives' conference, failing resolution of the dispute, to agree on methods of resolving it, because such requirement would either mean that:

• the final paragraph of the clause is redundant, since the parties have agreed on an alternative method of resolving the dispute (and this would be contrary to the application of proper principles for the construction of commercial contracts that require clauses to be construed as a whole and given effect to accordingly – see Chamber Colliery Limited v Twyerould, referenced above); or
• the application of the final paragraph would necessitate the agreed method of resolving the dispute to be undertaken and completed within the 14 or so remaining days between the senior executives' conference and the expiry of 28 days from the date on which the dispute notice was served – which does not appear to be a businesslike and commercial interpretation of the meaning of the clause and could be unworkable (see McCann v Switzerland Insurance Australia Limited, referenced above) particularly if, for example, the agreed method of resolving the dispute was referral to arbitration in the absence of any express obligation of the parties to extend the time period.

Application to the Australian Standards form

The wording of the relevant clause in the Australian Standards suite of contracts differs from the wording of the clause in WTE v RCR and also varies between the various contract suite series.

In AS 4300-1995 and AS 4303-2000, the unmodified form of the clause states:

In AS 4305-1996, the unmodified form of the clause states:

These versions of the clause are similar to the clause in WTE v RCR and, it is submitted, ought to be enforceable for the reasons set out above.

It is true that an issue may arise regarding the application of the deemed referral to arbitration in circumstances where the parties have, at their conference, agreed to resolve the dispute by other means, but have not done so within 28 days of the giving of the notice of dispute (see the discussion of this issue above). Presumably any agreement reached in conference would supplant the referral, but this is unclear. Nevertheless, this is not a matter that impinges upon the enforceability of the obligation to confer (as opposed to agree), nor is it identified as being relevant to the conclusions reached in WTE v RCR.

The unmodified form of the clause in AS 4000-1997, AS 4122-2000, AS 4901-1998, AS 4902-2000, AS 4903-2000, AS 4905-2002 and AS 4906-2002 is cast in somewhat different terms. In these contracts, the clause states:

It is submitted that, properly construed, this form of clause is also valid and enforceable.

Result or intention?

If the word "to" in the phrase "the parties shall confer at least once to resolve the dispute or to agree on methods of doing so" is construed as denoting the "result or consequence" of the conference (cf. the eighth meaning ascribed by the Macquarie Dictionary to the word "to"), then the clause may be seen as requiring agreement and be invalid.

However, once again, an alternative interpretation is available, namely, one in which the word "to" is construed as denoting the "aim, purpose or intention" of the conference (cf. the sixth meaning ascribed by the Macquarie Dictionary to the word "to") and not a mandatory outcome. Such an interpretation would not lead one to conclude that the clause required agreement as to methods of resolving the dispute if resolution itself could not be achieved, and should be preferred over the interpretation that leads to a conclusion of invalidity (Greater London Council v Connolly, referenced above).

Is the Standards Australia review of its suite of contracts warranted?

It is always prudent practice for practitioners to view standard contracts critically and in light of the specific needs of their clients. However, for the reasons set out above, the drafting of the current standard form of dispute resolution clauses is a far cry from that of the commercial documents the subject of Lord Upjohn's lament.

It is unclear whether the decision in WTE v RCR would be followed by other superior courts and whether the foreshadowed review of its suite of contracts by Standards Australia is actually warranted based upon that decision. It is submitted that, for the reasons set out in our October article, it may be appropriate for any review also to focus upon removing the involvement of the superintendent from participation in dispute resolution processes.

Drafting dispute resolution clauses to avoid ambiguity

Nevertheless, perhaps one way of avoiding doubt as to whether a clause could be challenged on the basis of WTE v RCR would be to spell out clearly the obligation of the parties only to confer in good faith to attempt to resolve a dispute or to attempt to agree on methods of doing so, failing which a clearly prescribed dispute resolution procedure (such as litigation, arbitration or expert determination) applies.

Andrew Murray
asm@cbp.com.au
Construction project procurement, risk management and contract administration
CBP Lawyers