Australia: Dispute Resolution Clauses In Project Contracts Revisited

Last Updated: 19 December 2008
Article by Björn Gehle

Key Point

  • Care must be taken in selection and drafting of complex dispute resolution clauses to avoid lengthy, complicated, and unintended outcomes.

The increasing complexity of commercial contracts has seen the emergence of new methods for resolving disputes through more efficient and effective dispute resolution processes. Often these processes comprise multiple layers and alternatives for the different types of disputes that may arise in the context of a commercial relationship.

While such complex forms of dispute resolution procedures have attractive benefits, failing to give careful consideration to their scope and application within a particular contractual scenario may render the dispute resolution mechanism inefficient and sometimes unenforceable.

Given the diversity of contractual relationships and disputes which may arise between parties there is no one-size-fits-all solution for dispute resolution clauses and due consideration should be given to the particular circumstances in each case. Nevertheless, standard dispute resolution clauses are a popular choice especially as they are often included at the last minute before the contract is concluded.

Experience has shown that once a dispute arises extra time and money is spent to overcome the deficiencies of those clauses which can put an additional strain on an already tensioned business relationship.

Making the right choice

The most common types of dispute procedures include:

  • negotiation (at different levels, eg. Project Manager, Executive etc.)
  • mediation and conciliation (facilitated settlement negotiations)
  • Dispute Review Boards
  • adjudication or expert determination
  • arbitration; and
  • litigation.

There are of course many other forms of dispute resolution which have been adopted in the industry, including hybrid process, such as early neutral evaluations, Med-Arb (as well as Arb-Med) and evaluative mediation.

At the outset one should start with preparing a risk assessment of the contract, including the parties' interests under the contract. This should disclose the nature and likelihood of potential disputes and the risk profile for each of the stakeholders involved. Once this has been done the most appropriate dispute resolution procedures can be selected and adjusted to the particular needs.

Often, project contracts comprise a large number of deeds, guarantees and other forms of agreement with various parties to form a complex matrix of relationships. In such situation it is even more important to develop a good understanding of the different relationships and interest involved to be able to:

  • properly manage disputes should they arise
  • de-escalate disputes or contain them within a small group of parties concerned by it; and
  • seek an enforceable outcome if necessary.

Multi-tier dispute resolution clauses

Disputes are rarely one dimensional, and as a result, contracts rarely provide for a single dispute resolution process. This can be seen in the increasing use of multi-tier clauses, which provide for several (often escalating) steps of dispute resolution processes at certain stages of a dispute.

Multi-tier dispute resolution clauses may enable parties to resolve disputes at an early stage without having to refer to more sophisticated adversarial processes such as arbitration or litigation. This can save time, money and, ultimately, business relationships.

Multi-tier clauses, however, often have shortcomings. For example, compulsory negotiation at various levels may not always be a good choice. There will be certain disputes which are better dealt with a project level, while others may require involvement on a CEO level.

Another common mistake is to require compulsory "good faith" negotiation. Negotiation is always available to parties whether or not it is specifically referred to in the contract. Business-savvy parties will always use negotiation as a primary means of resolving disputes. There are however situations in which parties are unwilling (or unable) to negotiate, and where the questions of whether a party has actually negotiated in good faith may become the subject of a dispute itself.

Further, it is also important that the different tiers of the dispute resolution process have effective triggers. This is particularly important where a party defaults or refuses to participate in the dispute resolution process. This is best achieved through the use of time triggers where a party can refer the dispute to the next step if a certain result is not achieved or an action is not taken by a certain date or within a certain time.

It is also important to include as the last resort a dispute resolution process which produces a final, binding and enforceable outcome. This will usually be arbitration or litigation.

Split procedures

In certain circumstances it may be advisable to have different dispute resolution procedures for different types of disputes (so called split procedures). This is especially useful for disputes which may not be suitable for a particular procedure or which require some senior or specialist involvement. Such clauses allow for a more efficient and effective resolution of disputes as certain disputes can directly be referred to a more appropriate process.

Common examples are:

  • nominating certain disputes (either by nature or value of the dispute) which are to be directly referred to the CEO level for negotiation; or
  • referring disputes directly to expert valuation where parties fail to agree on a price

Great care must be taken when drafting a split clause. Drafting a contract which lists distinct processes that are activated depending on the type of dispute can be fraught with danger as a dispute may either fall within more than one category or not fall within any, in which case the only option might be to refer the dispute to the courts.

A safer approach would be to draft the dispute resolution process for all disputes and specify (ie. to carve out) those which should be dealt with differently.

Careful drafting adds value

Tailored dispute resolution clauses offer a number of advantages over standard form clauses. The above comments can only provide a limited view on the different situations that should be considered when drafting dispute resolution clauses.

The complexity of large project agreements require careful consideration and drafting in relation to all aspects of the project agreement - this includes the dispute resolution provisions. Time and money spent at an early stage of the drafting of the project agreement is likely to deliver significant value and benefits at a later stage if and when the relationship between the parties turns bad.

The following are some general principles which should be observed when drafting a dispute resolution clause for project contracts.

  • The clause should provide for a mandatory procedure for resolution of the dispute and not be left to further discussions between the parties.
  • Requirements such as "make all reasonable efforts" or "negotiate in good faith" should be avoided.
  • Consider whether certain disputes are better dealt with under a different dispute resolution process then others.
  • Include a default procedure or automatic trigger for the different steps required under dispute resolution clause to prevent a party blocking the dispute resolution process.

Thanks to Lee Power for his help in preparing this article

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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