Australia: ADR clauses: are they meeting expectations?

Services: Property & Projects
Industry Focus: Property

What you need to know

  • Alternative dispute resolution (ADR) can often provide cost-effective alternatives to court proceedings when disputes between parties arise, including those between landlords and tenants.
  • ADR will not always be appropriate in every case, and difficulties can sometimes surface in the practical application of ADR clauses contained in leases and other agreements.
  • It is important for all parties to carefully consider the ADR clauses that appear in their contractual documents, and to understand ADR's limitations.

Alternative dispute resolution (ADR) clauses are commonly incorporated into leases, and landlords often include them in other documents such as service and supply agreements.

The general perception is that when things go wrong, ADR can provide a quick and cost-effective alternative to court proceedings. However, parties are likely to be left disillusioned if they assume this will always be the case.

The reality is that ADR will not be appropriate in all circumstances. It is also impossible for any drafter of an ADR clause to foresee and provide for all possible scenarios, so no ADR clause in a lease or any other agreement can ever be completely bulletproof.

In this article we share some insights about ADR clauses in light of some practical experiences with applying them, and also discuss some of ADR's limitations.

Period of negotiation

ADR clauses sometimes require a period of negotiation between the parties as the initial step in handling a dispute.

Such clauses typically provide for service of a 'notice of dispute' by one of the parties, and then stipulate a period in which the parties are required to meet, negotiate and attempt to reach a resolution.

The timeframes given to meet and reach a resolution can sometimes be unrealistic. Whilst a quick outcome is preferable, the availability of the relevant parties to meet, as well as the exchange of documents or information, may require more time than is allowed for in the agreement. In practice, parties can agree to extend the timeframe if it appears that further time is warranted, and it is generally recommended that they do so.

The negotiation phase is an important step in the ADR process. It is vital that parties do not approach it with a 'tick a box' mentality. If genuine efforts are made to address the issues in dispute, the parties may be able to avoid significant further costs and delays down the track. Making such genuine efforts early on can be particularly useful in circumstances where the parties have a shared interest in maintaining a positive relationship, such as a landlord and tenant.

If the dispute is not resolved through negotiation the next step is usually mediation, expert determination or arbitration. Expert determination and arbitration are usually binding, and are considered in more detail below.

Expert determination

Expert determination is generally considered appropriate for disputes which are relatively simple in content or are essentially technical in nature. For example, in a leasing context, disputes around repair obligations or make good requirements may suit determination by an appropriately qualified expert such as a quantity surveyor or architect. On the other hand, an issue relating to quiet enjoyment, which is the subject of a long history of common law, may be better suited to judicial determination.

If an ADR clause does not provide for a specific procedure to be followed by the relevant expert, the procedure will be determined by the expert (or experts) appointed. However, agreements for expert determination or arbitration often adopt the rules of an independent body such as the IAMA (Institute of Arbitrators and Mediators Australia, now the Resolution Institute).

Under the IAMA Rules the expert is required to adopt procedures that will be suitable to the circumstances of the particular case, avoiding unnecessary delay and expense to provide an expeditious, cost-effective and fair means of determining the dispute. To achieve that end, the Rules generally require the expert to provide a written determination as soon as reasonably practicable after receiving the parties' submissions and evidentiary material. However, the parties remain at the discretion of the expert (or experts) to adopt procedures that will deliver that outcome, and will ensure they do not overcommit themselves and cause the determination to be delayed as a result. Under the IAMA Rules there are avenues for the parties to object, such as where the process has been improperly conducted or there has been some other irregularity affecting the expert appointed to conduct the process.

One of the limitations of expert determination is that the processes adopted are not always so different from standard court processes. As a result, there may not be significant cost savings to be garnered from the ADR process. For example:

  • the expert determination process usually includes a statement and a reply, which can sometimes require a similar amount of detail to the litigation process of a statement of claim and defence.
  • the expert determination process often includes the exchange of documents and evidence (including expert evidence) and written submissions.
  • the expert can make directions as he/she considers appropriate, such as ordering expert conclaves, meetings, oral submissions or the submission of further material.

Those familiar with the litigation process may recognise the similarities between these elements and standard court proceedings.

There are also financial considerations to be weighed up. In addition to the procedural costs, expert fees also need to be taken into account which can be substantial (even though they are shared), particularly where there is more than one expert and where senior practitioners are appointed.

Finally, there are no avenues of appeal from a binding expert determination (unless the agreement provides otherwise). Like judges, experts can get the law wrong, but the court process provides a right of appeal if that happens. To limit the damage that can arise from an expert getting it wrong, a monetary limit can be incorporated into the agreement for disputes to be dealt with by binding expert determination. The ADR clause may also set out circumstances in which a determination is not final and binding.

Arbitration

Under the IAMA Rules parties can pursue fast track arbitration, which is not available for expert determination under the IAMA Rules. Fast track arbitration may help to avoid delays.

Using the fast track process, parties can agree (for example, where the amount in dispute is relatively small) that the arbitration will proceed based on the submission of documents alone.

However, the practical reality with arbitration is that there may be little (if any) cost saving. Arbitrations include similar processes to court proceedings (for example, parties must file a statement of claim, defence, cross-claim, submissions etc) and they can include hearings for the presentation of evidence and oral argument. Also pursuant to the IAMA Rules, the amount of legal costs recoverable can be capped, unless otherwise agreed in writing or directed by the arbitral tribunal.

Parties should also be aware that opting for arbitration does not always mean they can completely avoid litigation. Disputes can and do arise around issues such as the arbitral tribunal's jurisdiction, and these can sometimes lead to litigation.

In NSW the Commercial Arbitration Act 2010 provides some limited grounds for setting aside an arbitral award, and establishes a right of appeal. However, a court is restrained from giving leave to appeal unless it is satisfied of certain things, and time limits apply to seeking leave.

Option to litigate

There is a common perception that in order for an ADR clause to be effective, it should mandate ADR, rather than provide an option of ADR or litigation.

However, there may be valid reasons for leaving the door ajar for litigation. Examples include situations where the parties cannot agree on the arbitrator or expert, or on the issues to be referred to the expert or arbitrator. Usually, agreements will provide that in those circumstances, the appointment of the arbitrator or expert is outsourced to an independent body such as IAMA. Where agreement cannot be reached on these preliminary issues, delay and possible additional costs will be incurred by having an independent body appoint someone, and that person will then have to determine, as a preliminary issue, the issues in dispute. In such circumstances, a party (or even both parties) may want the option of litigating because the benefits of ADR are eroded.

The option to litigate does not prevent parties from pursuing ADR. ADR used in tandem with litigation can be very effective. Pressure points in the litigation can often drive parties to the negotiating table and result in the early resolution of a dispute.

Whether or not the option to litigate in some circumstances is left open, an agreement should enable either party to seek urgent restraining orders or injunctive relief from a court.

Other issues to consider

Other issues that can sometimes arise when applying ADR clauses include:

  1. The scope of disputes caught by the ADR clause:

If it is intended that all disputes be dealt with in accordance with an ADR clause then the clause should make this clear. Words such as "any disputes arising out of or in connection with the contract" or "arising out of or relating to the contract" are generally considered broad enough to capture all disputes. Some clauses go further and include "any disputes arising out of or relating to the contract, its formation, application, construction, scope and/or validity".

  1. Place of ADR and governing law:

If the parties are not located in the same jurisdiction, the ADR provision should specify where the negotiations, mediation, and expert determination or arbitration are to be held. The provision should also separately and clearly specify the governing law of the contract.

  1. Avoid ambiguity:

It is important to be clear about the agreed method for resolving disputes. For example, an exclusive jurisdiction clause by which the parties consent to the jurisdiction of a certain court, paired with an agreement to arbitrate, can create uncertainty about whether the parties intended arbitration to be the exclusive dispute resolution process.

Key takeaways

ADR can, and often does, deliver a quick and cost effective means of resolving disputes, but not in all cases.

When drafting ADR clauses it is important for the parties to consider:

  • the type of transaction involved and the nature of the parties to the agreement
  • what potential disputes may arise between the parties and whether ADR is appropriate to all
  • the type of issues that may arise when applying ADR clauses
  • the limitations of ADR, acknowledging that it is not necessarily a "quick and cost effective" fix for all types of disputes.

One overriding factor that could ultimately tip the balance in favour of ADR may be the preference of one or both parties to keep disputes out of the public domain. ADR can usually deliver on that, as the process and outcome are generally kept confidential (with some exceptions). The cost of that preference may be that the parties are committed to a process which is binding and does not provide any scope for appeal.

This article is intended to provide commentary and general information. It should not be relied upon as legal advice. Formal legal advice should be sought in particular transactions or on matters of interest arising from this article. Authors listed may not be admitted in all states and territories

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