It is perhaps a regrettable reality of business that there will be differences of opinion as to how a contract will be performed and, often more importantly, how the benefits will be shared. Often these disagreements are anticipated in the contractual wording and, once a party is reminded of their contractual promises, a dispute is avoided.
As it is impossible to anticipate every potential disagreement, well drafted contracts contain mechanisms for resolving disputes. These range from the simple governing law and choice of jurisdiction clauses to complex multi-tier dispute resolution agreements. Negotiation, mediation, expert determination, arbitration and litigation are all dispute resolution mechanisms used to resolve disputes in a timely and efficient manner.
These mechanisms can either be incorporated into the contracts between parties at the time of contracting or at the time of a dispute. Experience tells us that when parties are in dispute, the likelihood of getting parties to agree on anything, including the best means of how to resolve any issues between them, is remote.
Furthermore, the potential for these dispute resolution mechanisms to resolve disputes quickly and efficiently depends very much on the nature and complexity of the dispute, the parties' desired outcomes and the amount of time and money parties are willing to spend on the resolution of the dispute.
It is important for in house counsel to have a solid understanding of the nature of these dispute resolution techniques to ensure that the procedure they adopt for the resolution of a dispute is the one best suited to the dispute, or potential dispute, in question.
This paper aims to provide in house counsel with a solid understanding of the various dispute resolution techniques by addressing the following issues:
- negotiation, mediation, expert determination, arbitration or litigation: which one should you choose?
- innovative ways of managing disputes
- drafting clauses that lead to a "win-win" situation and how to avoid uncertainty.
Throughout the paper there are a number of practical tips and sample clauses to assist.
1. Negotiation, mediation, expert determination, arbitration or litigation: which one should you choose?
Tip 1
One dispute resolution mechanism rarely provides an optimum outcome- most disputes will require a mixture of techniques.
Generally
A broad distinction can be drawn between litigation and alternative dispute resolution (which includes negotiation, mediation, expert determination and arbitration). It is more accurate to draw a further distinction between arbitration and negotiation, mediation and expert determination due to arbitration's quasi-judicial nature.
It should also be recognised from the outset that most disputes will typically require a mixture of techniques that need to be applied, often in the usual form, escalating from informal (negotiation, mediation etc) through to formal (arbitration, litigation). However some disputes are best handled by changing the order. For example, an urgent application to the court for an injunction to determine the parties' legal rights on an interim basis followed by the intervention of a mediator to resolve matters that would otherwise be left to a full hearing that would not have occurred for over a year. An overview of dispute resolution mechanisms is annexed at A.
To decide which mix of dispute mechanisms are most suitable it is best to consider them in isolation.
Negotiation
Negotiation is often the first and most widely utilised method of dispute resolution. Negotiation involves communication between the parties, without the intervention of a third party, in an attempt to resolve a dispute that has arisen or a potential dispute that may arise between them.
Negotiation can be either a formal or informal process. When a dispute arises, parties will often undertake informal negotiations without being aware that they are doing so. Formal negotiations are the result of an agreement between the parties to refer a dispute that has arisen, or a dispute that may arise, to negotiation. This is usually characterised by a clause that requires the parties to negotiate (often in "good faith") for a certain period during which formal procedures cannot be undertaken.
The outcome of negotiation will only be binding in the event that the parties choose to conclude a settlement contract or deed that represents the final outcome of the negotiation. In the event that this settlement contract or deed is breached, the other party then has the right to seek remedies for breach of contract.
When should negotiation be considered?
Negotiation should be considered when the parties believe that a commercially acceptable compromise can be reached without the intervention of a third party. It is a good method of dispute resolution when the parties do not have a significant amount of time and money to commit to the resolution of the dispute.
Advantages
Negotiation is fast and inexpensive. As a result of this, and the fact that the adversarial elements of litigation are absent, the commercial relationship between the parties has a greater chance of surviving the dispute unharmed.
Parties to a negotiation have a greater degree of control over the dispute resolution process and outcomes, and can agree to keep the negotiation and the existence of the dispute confidential.
Disadvantages
Parties to negotiation are not compelled to continue with the dispute resolution process, and can opt out at any time.
Where the dispute subject of the negotiation is the result of a spurious claim by one of the parties, expenses incurred are not recoverable once the dispute has been resolved.
There is also the chance that the outcome of the negotiation will favour the party with the strongest negotiation skills.
Sample clause
In the event of any dispute, claim, question, or disagreement arising from or relating to this agreement or the breach thereof, the parties hereto shall use their best efforts to settle the dispute, claim, question or disagreement. To this effect, they shall consult and negotiate with each other in good faith and, recognising their mutual interests, attempt to reach a just and equitable solution within a period of 60 days. In the event that the parties do not reach a solution within 60 days, the dispute will be referred to [mediation, expert determination, arbitration, litigation].
Mediation
Tip 2
Mandatory mediation is not an oxymoron.
Mediation can be mandatory, court-annexed or voluntary.
Gradually there has been an acceptance that the process of mediation is worthwhile and even recalcitrant parties should be required to participate in the process.
Mandatory mediation will take place where parties to a dispute are compelled by applicable legislative provisions to refer disputes of a particular nature to mediation (for example, mediation of retail lease disputes in New South Wales under Division 2 of the Retail Leases Act 1994).
Court-annexed mediation takes place where a judge orders that a dispute pending in court be mediated in an attempt to prevent unnecessary litigation (for example, see Part 4 of the Civil Procedure Act 2005).
Voluntary mediation is, as the name suggests, where the parties agree between themselves to attempt resolution of a dispute by way of mediation.
Mediation is based on structured and assisted discussions/negotiations between the parties with a view to achieving a voluntary settlement. It involves the appointment of a neutral third party to assist the parties in resolving the dispute.
The mediator is not necessarily someone with specialist legal or technical understanding of the issues in dispute. However, it is the role of the mediator to examine the issues with the aim of assisting the parties to develop realistic solutions. In performing this function, the mediator will assist in the identification of key points of difference and/or agreement, attempt to develop solutions not already considered by the parties and encourage the parties to consider all available alternatives.
As an informal dispute resolution process, mediation can be implemented prior to, or in conjunction with, other forms of dispute resolution such as arbitration or court proceedings.
Legal representation is not necessary in mediation proceedings, and the fees of the mediator are generally shared equally between the parties by agreement.
The outcome of the mediation will not be binding on the parties unless they choose to conclude a settlement contract or deed that represents the final outcome of the mediation. In the event that this settlement contract or deed is breached, the other party may seek remedies for breach of contract.
Tip 3
Don't be afraid to try mediation very early in a dispute
When should mediation be considered?
Mediation is a quick, easy and inexpensive method of dispute resolution and should be considered as soon as possible once a dispute has arisen and attempts to negotiation have been unsuccessful or have stalled.
The mediator does not have the power to force the parties to adopt a particular position. Consequently, mediation is most effective where the parties are independently motivated to settle the dispute that has arisen between them.
Advantages
Mediation is quick and relatively inexpensive. As a result of this, and the fact that the adversarial elements of litigation are absent from mediation, the commercial relationship between the parties has a greater chance of surviving the dispute unharmed.
Parties to mediation have a greater degree of control over the dispute resolution process and outcomes and can agree to keep the mediation and the existence of the dispute confidential. The presence of a third party can increase the fairness of the dispute resolution process and its outcome.
Disadvantages
The mediator is generally not equipped with sufficient powers to redress any power imbalance in the relationship between the parties and this may affect the fairness of the outcome.
Parties can use mediation as a delaying tactic and there is no guarantee that the mediator will be able to successfully settle the dispute.
Even if the dispute is successfully settled, the mediator's decision is not binding in itself unless enshrined in a settlement contract or deed.
A poorly chosen mediator may actually hinder the dispute resolution process, or may pressure parties into accepting a settlement that is contrary to their interests.
Sample clause
A typical mediation clause is:
- if a dispute arises out of or relates to this agreement, or the breach, termination, validity or subject matter thereof, or as to any related claim in restitution or at law, in equity or pursuant to any statute, the parties to the agreement and the dispute expressly agree to endeavour to settle the dispute by mediation administered by the Australian Commercial Disputes Centre (ACDC) before having recourse to arbitration or litigation
- the mediation shall be conducted in accordance with the ACDC Guidelines for Commercial Mediation which are operating at the time the matter is referred to ACDC
- the Guidelines set out the procedures to be adopted, the process of selection of the mediator and the costs involved
- the terms of the Guidelines are hereby deemed incorporated into this agreement
- this clause shall survive termination of this agreement
(ACDC Model Mediation Clause).
Following the decision of the New South Wales Supreme Court in Hooper Bailie Associated Ltd v Natcom Group Pty Ltd (1992) 28 NSWLR 194 agreements to mediate will be considered binding in the same way as arbitration agreements, and will consequently be enforced by the courts.
How to manage mediation
The functions performed by a Mediator are similar to those of an Arbitrator in the sense that both take an active role in the resolution of the dispute. However, unlike arbitrators, mediators do not have the power to impose their decision on the parties.
In order for parties to receive the full benefit of mediation, it is important that parties undertake substantial preparation before the mediation. In preparing for mediation, it is important to do the following:
- determine what the issues in dispute are. Rank the issues in dispute in order of their importance to your client and be prepared to make concessions in relation to those that do not substantially affect your client's interests
- consider what your client's interests are and what they want to achieve. Use this to formulate your client's 'bottom line'
- consider the needs, demands, strengths and weaknesses, position and version of facts of other parties to the mediation and formulate an approach in relation to those factors
- after considering the above, develop an appropriate strategy for the mediation proceedings. This may include the development of alternatives and/or solutions that are available to the parties
- ensure that all relevant documentation is available for the mediation and that you have developed sound reasoning to support the proposals and/or claims you intend to make.
By following the above procedure, parties will be able to take advantage of the mediation process and develop solutions acceptable to their client and the other parties to the dispute.
Expert determination
Expert determination involves the nomination by the parties of an independent third party, being a sole expert or a panel of experts, to provide an objective, independent and impartial determination of the issues in dispute. Expert determination can be more inquisitorial than other dispute resolution processes and is often more informal than arbitration or litigation.
Expert determination is often utilised in disputes that are relatively simple in context, do not involve large amounts of money and are essentially technical in nature.
While more formal than negotiation and mediation proceedings, expert determination proceedings are governed primarily by the agreement of the parties. Consequently, the terms in which the parties agree to refer a dispute, or a potential dispute to expert determination is extremely important.
Where a binding determination is agreed upon, there will be no right of appeal unless the parties agree otherwise, or in limited circumstances where a determination can be challenged.
Close attention should be paid to the powers conferred upon the expert under the expert determination agreement. Even if parties agree that the expert determination will be binding, it will not be enforceable to the extent that the decision falls outside of the scope of the agreement to refer the dispute to expert determination.
Often, the parties will agree to make written submissions and provide supporting documentation to the expert to assist in their determination. The expert may also confer with the parties in the course of considering the questions put to him/her for determination.
The costs of the expert determination are generally shared between the parties. Often the costs incurred are lower due to the fact that expert determination does not have the formal requirements of litigation, like the hearing of evidence and the cross examination of witnesses.
Tip 4
Expert determination should be considered where the parties are interested in a fast, flexible, confidential, inquisitorial and relatively inexpensive method of dispute resolution.
when should expert determination be considered?
Expert determination will be appropriate where the dispute that has arisen between the parties requires an expert or a professional understanding of the technical or financial issues involved. It is important to carefully "carve out" particular issues from the broader issues in dispute and only refer those issues to expert determination. That way, legal or non-technical issues can be resolved by an alternate method of dispute resolution. Chesterman J in Zeke Services v Traffic Technologies [2005] QSC 135 found that some of the issues referred to expert determination were issues of law, and not ones that should be determined by an expert – "Accordingly I conclude that some only of the complaints may be appropriately determined by an expert. There should be no stay with respect to those matters. To order a stay of the proceedings to allow the expert to determine some only of the complaints would be unsatisfactory. The same decision-maker should determine all questions in dispute. As the court must determine some, it should determine all" (at [37]).
Expert determination has been incorporated into many of the new standard forms of construction contracts to deal with disputes arising under the contract. The Property Council of Australia standard form contract for building and civil works, Project Contract PC-1 (1998), establishes a system whereby disputes arising under specified clauses must be submitted to expert determination unless a resolution is reached in 14 days. Once a determination is given it is binding, unless a notice of appeal is given within 21 days of the determination being made,in which case the dispute is referred to executive negotiation and arbitration. Other standard form contracts provide for expert determination to be binding where the award is under a certain sum, such as $500,000.
Advantages
As a result of its informal nature, expert determination can be a very quick and cost-efficient method of dispute resolution. Expert determination is particularly advantageous where the parties are involved in an ongoing project, as it allows disputes to be addressed quickly and efficiently so that the project can continue.
The parties have the power to appoint an expert or panel of experts that they consider to be the most appropriate to hear the dispute.
Disadvantages
Expert determination is, by nature, less rigorous than arbitration and litigation.
Like other dispute resolution mechanisms, the procedural elements of which are reliant on the agreement of the parties, there is the possibility that one party may seek to delay proceedings for tactical or strategic reasons.
Delay can also be the result of imprecision in defining the scope of the expert's mandate and the manner in which the determination is to be conducted.
In the event that the expert's jurisdiction is not clearly defined, and the parties can not agree on whether a particular issue should be determined by the expert, there is no principle allowing the expert to determine the extent of his or her jurisdiction (cf the principle of 'competence-competence' in arbitration). This has the potential to delay the determination or force the parties to abandon expert determination altogether.
Critics say that expert determination is generally not appropriate for the resolution of large disputes that involve complex factual or legal arguments, or where the issues in dispute can not be resolved by a consideration of documentation and written submissions.
Tip 5
Do not nominate an expert by name in a contract as you never know what may happen to them
An expert, unless obliged to do so by the contract of the terms of his/her appointment does not have to comply with the requirements of procedural fairness or natural justice. Provided that the expert has conducted the determination in accordance within the expert determination agreement, the only basis on which the determination can be set aside is dishonesty. In Zeke Services v Traffic Technologies [2005] QSC 135, Chesterman J cited the judgment of Lawton LJ in Baber v Kenwood Manufacturing (1978) 1 LLR 179 at 181:
“Now experts can be wrong; they can be muddle-headed; and, unfortunately, on occasions they can give their opinions negligently. Anyone who agrees to accept the opinion of an expert accepts the risk of these sorts of misfortunes happening".
There is little legislative or judicial support of expert determination from a procedural point of view (especially in comparison to arbitration).
Sample clause
A typical expert determination clause is:
"If a dispute arises out of or relates to this agreement, or the breach, termination, validity or subject matter thereof, or as to any related claim in restitution or at law, in equity or pursuant to any statute, the parties to the agreement and the dispute expressly agree to settle the dispute by expert determination administered by the Australian Commercial Disputes Centre (ACDC).
- the expert determination shall be conducted in [location of expert determination proceedings] in accordance with the ACDC Rules for expert determination operating at the time the dispute is referred to the ACDC
- the Rules set out the procedures to be adopted, the process of selection of the expert and the costs involved
- the terms of the Rules are hereby deemed incorporated into this agreement
- this clause shall survive termination of this agreement.
(ACDC Model Expert Determination Clause).
While it may not be apparent from the face of the clause, this is an agreement that the expert determination shall be binding. The agreement refers to the ACDC Rules for Expert Determination, which state that the expert determination will be binding on the parties. In the event that the parties want binding expert determination, but do not want to use the rules used in the example above, it is important to consider whether it will be necessary to alter the wording of the clause to ensure that the expert determination is binding.
An agreement to refer a dispute to expert determination will be upheld by the courts provided that the agreement clearly states the way in which the expert determination proceedings are to be conducted. Where the expert determination agreement is not sufficiently clear, the court may consider whether the dispute is one that is appropriate for determination by an expert in deciding whether an expert determination agreement should be upheld (Zeke Services v Traffic Technologies [2005] QSC 135).
Arbitration
Arbitration is a formal dispute resolution process whereby the parties agree to refer a dispute that has arisen, or may arise, to an independent third person (the arbitrator) for determination. Commercial arbitration is a process generally applicable and now widely used as a means of dispute resolution in many areas of commerce and industry throughout the world.
Commercial arbitration has become the preferred procedure for parties seeking a binding determination of their dispute as an alternative to court based litigation. Under the direction of a qualified arbitrator, it can be an expedient, private and efficient method of dispute resolution.
Parties can conclude an agreement to refer a dispute that has arisen, or that may arise, to arbitration. When doing so, the parties can specify the scope of the agreement to arbitrate, the nature of disputes that will be resolved by arbitration and the rules that will govern the arbitration.
The arbitration procedure is conducted in accordance with the principle of natural justice but may vary depending on the nature and complexity of the matter. In many cases there will be a judicial style hearing but sometimes the determination can be made on the basis of documentary submissions alone.
The result, known as the Award, is enforceable in the same way as a court judgment. Generally the tribunal will award damages, but it may also order other remedies like rectification and specific performance.
Arbitration in Australia is governed by state-based legislation. In New South Wales, arbitration proceedings are governed by the Commercial Arbitration Act 1984. International arbitration in Australia is governed by the International Arbitration Act 1974 (Cth) which incorporates the United Nations Commission on International Trade Law Model Law on International Commercial Arbitration (the Model Law).
When should arbitration be considered?
Arbitration should be selected as the preferred process for dispute resolution when parties require procedures similar to that available in court but without the delays, public access or formality. Arbitration is similar to litigation in the sense that formal claims and defences are lodged, evidence is put forward by each party, usually tested by cross-examination, with a binding and enforceable decision resulting. However, in contrast with litigation, parties have the benefit of setting their own timetable, conducting the hearing in private with an arbitrator of their choice and of utilising simpler procedures.
When using arbitration as the process for resolving a dispute, parties are able to select an arbitrator with particular expertise and commercial experience in the subject matter of the dispute. The selection of a specialist tribunal facilitates more efficient, effective and acceptable procedures and outcomes.
Tip 6
Don't confuse arbitration with litigation otherwise you get the worst of both Arbitration should be considered where parties want disputes to be resolved
- efficiently and quickly
- with privacy and confidentiality
- in a final and enforceable way
- in accordance with the law and each parties’ rights.
Advantages
Arbitration is a flexible method of dispute resolution and allows parties the freedom to determine the rules that will govern the proceedings. Depending on the complexity of the dispute, arbitration is generally an inexpensive and efficient way of resolving disputes.
The tribunal has the power to rule in relation to its own jurisdiction ('Competence-Competence'), which can reduce the amount of time and money spent trying to resolve procedural issues relating to the tribunal's jurisdiction.
Australian courts are supportive of the arbitral process and will only intervene in very limited circumstances.
Confidentiality of arbitration proceedings is an advantage where the parties want to avoid adverse publicity that may result from the publication of information relating to the dispute.
The tribunal has the power to award legal costs where it considers it appropriate to do so.
Awards rendered in international arbitration proceedings are readily enforceable in Australia and in other countries that are signatories to the United Nations Convention on the Recognition and Enforcement of Arbitral Awards (which has been adopted by 138 countries).
Disadvantages
Depending on the nature of the dispute and the manner in which counsel conduct the proceedings, arbitration can be as expensive and time consuming as litigation. In order to avoid this, parties should avoid the temptation to conduct arbitration proceedings as if they were litigation proceedings.
Arbitrators sometimes have less control over the arbitral proceedings than judges in litigation proceedings, which can cause delay and expense.
Sample clause
The basis of all arbitration proceedings is an agreement between parties to refer to disputes generally or a particular dispute for final and binding determination by a third party. This agreement is usually made before a dispute has arisen, by including an arbitration clause in a commercial contract or agreement, or by incorporating a separate document that includes an arbitration clause. However, an agreement to arbitrate can be made at any time. Regardless, a specific agreement in writing must exist as there is no general right to arbitration, such as is the case with litigation.
Tip 7
A dispute resolution clause providing for arbitration is severable from the contract of which it forms a part.
A typical arbitration clause is:
Any dispute, controversy or claim arising out of, relating to or in connection with this contract, including any question regarding its existence, validity or termination, shall be resolved by arbitration in accordance with [institutional rules]. The seat of arbitration shall be [place in which the arbitration will take place]. The language of the arbitration shall be [language]. The number of arbitrators shall be [one or three]
(Australian Centre for International Commercial Arbitration Model Clause).
See Annexure B for a Checklist for drafting an arbitration clause.
Avoid "pathological" arbitration clauses
Often arbitration clauses are badly drafted leading to uncertainty and expensive litigation over whether a party is bound to the clause. These are referred to as "pathological" arbitration clauses.
Examples include:
"All disputes as to the interpretation and performance of the Agreements are to be settled by three arbitrators, whose function us to produce an amicable settlement."
"In the event of a dispute over the access fee where all other conditions of access have been agreed at the request of the non-member the matter will be submitted to arbitration by independent expert(s)"
"Suitable arbitration clause" (Hobbs Padgett Amps & Co (Reinsurance) Ltd v J C Kirkland Ltd and Kirkland [1969] 2 Lloyd's Rep 547). "...arbitration to be settled in London"
Clauses providing for arbitration by the "Chamber of Commerce of Buenos Aires", the "International Chamber of Commerce of Geneva", the "Paris Chamber of Commerce", the "Arbitration Court in Zurich", "Paris Chamber of Arbitration", or the "Arbitration Commission of the Paris Chamber of Commerce and Industry", none of which exist.
Litigation
Litigation is the formal adjudication of disputes via the court system. Australian courts operate on an adversarial basis and proceedings are governed by the court rules.
The remedies available in litigation proceedings are: damages, injunctions, specific performance, declarations and various enforcement processes.
When should litigation be considered?
Litigation should be considered where parties have a large amount of time and money to commit to the resolution of the dispute, and where the amount in dispute is significant.
Litigation will also be appropriate where the parties are not concerned about maintaining the confidentiality of the proceedings, and particularly where there is a strategic advantage to publicising the dispute.
Litigation is also ideal where there dispute involves a large number of parties as the court has the power to join those parties to the action.
Advantages
A wide variety of remedies are available through the courts, and these remedies are easily enforceable. The court also has the power to award costs as it considers appropriate.
The availability of easily accessible avenues for appeal can be advantageous, but also has the potential to increase costs.
Tip 8
If you are the "big guy", litigation may be the best option
Disadvantages
Litigation can be very time consuming and expensive.
Litigation is a rigid and formal process and the parties do not have the power to choose the law and/or rules that they would like applied to the dispute.
As court proceedings are not confidential, it may be difficult for your client to avoid any adverse publicity resulting from the court proceedings.
2. Innovative ways of managing disputes
Online dispute resolution
Negotiation, mediation and arbitration can be conducted online. Essentially online dispute resolution involves:
- the exchange of documents over the internet
- the use of 'read receipts' to track who had access to documents, and at what time
- the uploading of documents onto a secure website (i.e. a virtual data room accessible by all parties to the dispute)
- oral submissions by teleconference.
The elements listed above can be implemented as appropriate, depending on the nature of the dispute. The use of online dispute resolution has the capacity to increase the efficiency and cost effectiveness of dispute resolution proceedings especially for disputes involving a large number of documents and parties that reside in different countries.
Stop clock arbitration
Stop clock arbitration proceedings are a popular way of ensuring that the dispute between the parties is resolved in an efficient manner. The arbitrator can determine, or the parties can agree, on an amount of time that is sufficient for the parties to present their case, taking into consideration the complexity of the issues in dispute.
Stop clock arbitration proceedings are characterised by limited oral argumentation and crossexamination, the reliance upon written submissions where oral submissions are not necessary and the increased intervention of the arbitrator in the conduct of the proceedings.
Med-arb
As the name suggests, Med-Arb is a combination of mediation and arbitration. Essentially it allows for the mediator to act as an arbitrator in the event that the parties fail to successfully resolve the dispute through mediation.
Med-Arb is best suited to parties involved in complex disputes where there is a genuine interest in reaching a binding and amicable settlement.
However, Med-Arb has been criticised on the basis that information provided to the mediator may affect the mediator's capacity to exercise independent judgment during the arbitration process.
Mediation-expert determination
Mediation-Expert Determination is similar to Med-Arb, but incorporates mediation and expert determination as opposed to mediation and arbitration.
Tip 9
One party can retain the right to nominate litigation or arbitration
3. Drafting clauses that lead to a "win-win" situation
Multi-tiered dispute resolution clauses
Multi-tiered dispute resolution clauses set out a series of distinct steps that parties are to follow in the resolution of their disputes. Often the steps, or 'tiers', begin with negotiation or mediation and culminate in arbitration or litigation.
When should multi-tiered dispute resolution clauses be considered?
Multi-tiered dispute resolution clauses should be considered where parties to a complex agreement/transaction involving large sums of money want to ensure that every reasonable attempt to resolve a dispute is made before the transaction/agreement is stalled while the dispute is litigated.
Advantages
Multi-tiered dispute resolution clauses are designed to require parties give serious consideration to the issues in dispute and participate in alternative dispute resolution before they proceed to litigation or arbitration. They are also useful in preventing parties from becoming entrenched in their positions and consequently increasing the expenses incurred in the resolution of the dispute.
Tip 10
Don't "over-engineer" your multi-tiered dispute resolution clause – keep it simple
Disadvantages
Problems can arise where it is not clear what a tier is and whether it has been successfully completed. A poorly drafted multi-tiered dispute resolution clause may not be enforced by Australian courts. The position of Australian courts is currently that parties will only be compelled to undertake the prelitigation/ arbitration tiers in a multi-tiered dispute resolution where there is a clear obligation on the parties to do so.
A clause will be considered to be poorly drafted where it includes subjective criteria in the determination of whether a particular tier has been completed (for example, 'negotiations in good faith').
Unless carefully drafted, multi-tiered dispute resolution clauses can be triggered by different parties at different times in relation to the same or different issues, leading to the overlap of factual and legal issues.
The New South Wales Supreme Court in Aiton v Transfield [1999] NSWSC 996 provided the following guidelines in relation to drafting enforceable multi-tiered dispute resolution clauses:
- it should be clear that the pre-litigation/arbitration tiers in the multi-tiered dispute resolution clause are a condition precedent to litigation or arbitration
- the procedures to be followed in the execution of the multi-tiered dispute resolution clause must be stated with sufficient certainty
- the procedures to be followed in the selection of mediators or experts and their remuneration should be expressly stated
- the procedures to be followed in the Mediation process should be expressly stated, or the rules to be applied to the Mediation should be incorporated by express reference
- there should be a clear and definite trigger for each tier of the multi-tier process.
In order to be enforced by Australian courts a multi-tiered dispute resolution clause should:
- be clearly drafted
- demonstrate that the tiers in the clause are intended to be a pre-requisite to arbitration or Litigation
- clearly specify the process to be followed at each tier
- clearly state what the 'trigger' for movement to the next tier will be.
It is important that multi-tiered dispute resolution clauses be carefully drafted to avoid various clauses being triggered by different parties at different times in relation to the same or different issues.
Conclusion
Every contractual relationship represents a different opportunity for applying dispute resolution techniques. For some, a cooperative approach is more suitable and thus a mix of negotiation and mediation may be appropriate. For others, it is better to identify in an objective manner the rights and obligations, so expert determination followed by arbitration might be more appropriate. The challenge for an in house counsel is getting the mix of ingredients right.
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Sydney |
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Damian Sturzaker |
t (61) 2 9931 4909 |
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.
