Australia: Dispute resolution clauses in some standard form contracts may be unenforceable

Last Updated: 6 November 2013
Article by Andrew Murray
But the worm shall revive thee with kisses;
Thou shalt change and transmute as a god,
As the rod to a serpent that hisses,
As the serpent again to a rod.

A. C. Swinburne, Dolores 1866

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

A recent decision of the Victorian Supreme Court has found that a contractual dispute resolution clause is unenforceable at law because it amounted to an "agreement to agree".

Decision has implications for numerous standard form contracts

On 29 August 2013, Standards Australia published an alert, Australian Standard Conditions of Contract, advising that dispute resolution provisions in a number of its standard form contracts should be reviewed in light of the decision of the Victorian Supreme Court in WTE Co-generation and Visy Energy Pty Limited v RCR Energy Pty Limited & Anor [2013] VSC 314.

In that case, Vickery J 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", which is unenforceable at law. His Honour refused to stay the proceedings pending the parties' compliance with that clause.

The Standards Australia contracts affected by the case are numerous and include:

Clauses requiring participation of superintendent or architect in dispute resolution process

The decision in WTE Co-generation raises the question as to whether other standard dispute resolution clauses might also be found to be unenforceable if subject to judicial scrutiny.

For the reasons discussed below, certain earlier decisions of the Supreme Courts of NSW and Victoria seem to place at risk a further class of dispute resolution clauses, namely, that requiring the participation of a superintendent or architect in the dispute resolution process itself.

Now that Standards Australia has expressed the intention to review all dispute resolution clauses within its current suite of contracts, it may be timely for it, and legal practitioners generally, to consider a wholesale revision of such provisions.

Enforceability of dispute resolution clauses – the general principles

It is trite law that the construction of dispute resolution clauses should be "approached liberally and not narrowly" and from a starting point that requires "parties to be held to their bargain". (See Hammerschlag J in Cessnock City Council v Aviation and Leisure Corporation Pty Limited [2012] NSWSC 221 at [31]).

It is also firmly established that dispute resolution clauses, provided that they are sufficiently broad in scope, will encompass "a dispute as to the circumstances of termination of the contract, regardless of whether or not parties regard the contract as any longer being on foot". (See Eastern Metropolitan Regional Council v Four Seasons Construction Pty Limited [1999] WASCA 144, the Full Court of the Supreme Court of Western Australia at [40] per Steytler J, with whom Pidgeon and Ipp JJ agreed.)

Only in limited circumstances will a party commencing court proceedings in defiance of a clause that mandates another form of dispute resolution procedure be able successfully to defend an application that such proceedings be stayed.

Examples of the limited circumstances in which a stay may be refused were identified by Hammerschlag J in Dance with Mr D Limited v Dirty Dancing Investments Pty Limited [2009] NSWSC 332 (Dirty Dancing) at [54], namely:

  1. where refusal of the stay would result in a multiplicity of proceedings;
  2. where, in the case of dispute resolution provisions that call for expert determination, the dispute is inapt for determination by an expert because it does not involve application of the expert's special knowledge to his or her own observations or the area of dispute is outside of the expert's field of expertise; or
  3. where the agreed procedures are inadequate for determination of the dispute that has arisen.

Enforcing dispute resolution clauses involving the participation of a superintendent or architect

The decision of Vickery J in WTE Co-generation was based squarely upon the "inherent uncertainty" of the operation of a clause that prescribed no "method of resolving the dispute", leaving that to further agreement between the parties. This, according to his Honour, offended the basic requirement of a valid and enforceable dispute resolution clause, namely the setting out of a "process or model to be employed... in a manner that does not leave this to further agreement".

But other dispute resolution clauses may be considered dubious for entirely different reasons - for example, dispute resolution clauses that, despite employing a detailed process or model, nevertheless require the participation of a person or entity which, at the time a dispute may arise, has a questionable status under the contract.

Standards Australia contracts AS 2124-1992 and AS 4300-1995 each require that the appointed superintendent give a written decision as a first step of the dispute resolution process. A similar provision, but requiring the involvement of an architect, is contained in a number of the JCC editions.

Disputes which arise after a contract is terminated or discharged

Provided that the dispute arises prior to the time at which a contract is terminated or discharged by performance, such a clause may be enforceable. However, where a dispute arises after termination (including a dispute as to the circumstances of termination) or discharge, some authorities suggest that enforceability problems may arise.

In FPM Constructions Pty Limited & Anor v The Council of the City of Blue Mountains [2005] NSWCA 340 (FPM), a majority of the NSW Court of Appeal discussed the extent to which the powers of a superintendent survive the termination of a contract (in that case, a contract based upon AS 4300-1995). Basten JA, with whom Beazley JA agreed, relevantly stated (at [185]):

...Absent some clear expression of intention that the superintendent have powers which survive termination, an inference to that effect should not be drawn. That is because clause 23, which confers powers on the superintendent, is in terms an obligation imposed on the principal. It is the principal's duty to ensure that 'there is a superintendent' and that the superintendent acts in the manner prescribed. There is nothing in clause 23 itself which suggests that the contractual obligation thus imposed on the principal continues to operate after the termination of the contract pursuant to clause 44.4. Nor, in my view, can questions of "obvious good sense" prevail over the clear intention of the specific clauses identified above.

His Honour went on (at [190]) to find that a similar conclusion should be drawn in respect of clause 47 of the contract, which governs dispute resolution.

Superintendent has no further role after final certificate issued

Even where a contract has not been terminated but a final certificate has issued, it appears generally accepted that a superintendent no longer has any further role in respect of the contract – as recognised in the Victorian decision of Southern Region Pty Limited v The Minister for Police and Emergency Services for and on behalf of the State of Victoria [2001] VSC 436 (Southern Region) at [44] per Byrne J:

The issue of the Final Certificate gives finality not only to the parties but also to the Superintendent. The Superintendent has no power to correct any error in it and no power to recall it or review it. Once it is issued the Superintendent is "to all intents and purposes functus officio": the role of the superintendent is then ended.

The same conclusion was reached by the Victorian Court of Appeal in Ian Delbridge Pty Limited v Warrandyte High School Council [1991] 2 VR 545 (Delbridge) at 550 per Murphy J, in relation to a different form of contract, which provided for an architect to exercise a similar certification role. (The decision of a Master in the Supreme Court of Western Australia in Western Australian Land Authority v Simto Pty Limited [2001] WASC 136, to the effect that a dispute resolution clause with similar provisions was binding on the parties notwithstanding the fact that the contract had been fully performed two years previously and a final certificate issued should, it is respectfully submitted, be treated with caution given that the cases referred to above do not appear to have been brought to the Master's attention.)

Superintendent or architect cannot be reinstated once their role has ended

Both scenarios appear to fall squarely within the third category of exception to the presumption in favour of the enforceability of dispute resolution clauses noted by Hammerschlag J in Dirty Dancing - namely, "the agreed procedures are inadequate for determination of the dispute that has arisen".

Indeed, if the FPM, Southern Region and Delbridge cases were correctly decided, the "agreed procedures" in their respective scenarios would require nothing short of the resurrection of a superintendent or architect who was otherwise "functus officio" (i.e. of no further force or authority), for the limited purpose of making an interim determination. In their conventional form, such contracts do not appear to confer such restorative powers upon a principal.

Time to reconsider effectiveness of dispute resolution provisions

Most of the current editions of the standard forms of contract have moved away from relying upon the participation of superintendents or other appointees in dispute resolution clauses. Nevertheless, the above cases suggest care should be taken when using forms which mandate such participation.

In light of the decision in WTE Co-generation, it would be timely for Standards Australia and the profession generally to reconsider carefully the effectiveness of many of the standard dispute resolution provisions that have for so long been taken for granted as being enforceable.

Andrew Murray
Construction disputes
Colin Biggers & Paisley

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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Andrew Murray
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