A Guide on the Enforceability of Dispute Resolution Clauses in Contracts

Introduction

Dispute resolution clauses are a vital part of any contract, providing a clear process for resolving disagreements without immediately resorting to litigation. These clauses help parties manage risk and maintain commercial relationships by setting out agreed steps such as mediation, arbitration, or negotiation before court proceedings can begin.

The enforceability of these clauses depends on how clearly and specifically, they are drafted within the contract. Understanding what makes a dispute resolution clause effective is essential for anyone entering into a contract, as it can significantly impact how disputes are managed and resolved.

Interactive Tool: Check If Your Dispute Resolution Clause Is Enforceable

Understanding Dispute Resolution Clauses in a Contract

What is a Dispute Resolution Clause?

Dispute resolution clauses are provisions within a contract that establish a pre-agreed process for handling conflicts between the parties. Their primary purpose is to provide a structured pathway for resolving disagreements through specified methods, often as a preliminary step or a complete substitute for court litigation.

An enforceable clause can also modify the legal rights of the parties involved. It can, for example, do the following:

• Alter statutory limitation periods for bringing a claim, potentially shortening or extending the time in which an action must be commenced.
• Impose compulsory arbitration, thereby defining both the jurisdiction and the procedural rules that will govern the resolution process.

Common Methods of Dispute Resolution

A contract may specify various alternative dispute resolution methods that parties must follow. Therefore, these clauses should be drafted with clarity and precision to avoid creating further disputes over their implementation.

Commonly used methods include:

• Binding Arbitration: A formal process where a neutral third party hears the dispute and makes a legally binding decision, typically governed by federal or state arbitration statutes.
• Expert Determination: An independent expert with relevant industry knowledge is appointed to assess the dispute and provide a decision.
• CEO Meeting: Senior executives, often the chief executive officers from each party, meet to negotiate a resolution at a high level.
• Mediation and Conciliation: A neutral mediator or conciliator facilitates discussions so the parties can reach a mutually agreeable settlement, but no decision is imposed.
• Negotiation: The clause may require parties to use reasonable endeavours to resolve the dispute through direct discussions before escalating the matter.
• Multi-Tiered Clauses: Also called hybrid or escalation clauses, these outline a sequence—such as negotiation, mediation, then arbitration or litigation—ensuring disputes pass through each step in order.

The Core Principles for an Enforceable Clause

Certainty: The Need for Clear & Unambiguous Language

For a dispute resolution clause in a contract to be enforceable, it must be written with clear and specific language. If a clause is vague, ambiguous, or leaves key parts of the process open to future negotiation, it may be considered an “agreement to agree” and deemed unworkable by a court.

The process must be sufficiently detailed to provide a clear roadmap for resolving a dispute. This principle is illustrated in the case of WTE Co-Generation & Anor v RCR Energy Pty Ltd & Anor [2013] VSC 314, where the contract required senior executives to “meet to attempt to resolve the dispute or to agree on methods of doing so.” The Victorian Supreme Court found this clause unenforceable because:

• The word “or” created uncertainty about whether the parties had to resolve the dispute or simply agree on a method.
• No process was prescribed for determining which path to take.

Compliance: The Expectation to Follow the Agreed Process

Courts generally expect parties to a contract to comply with the dispute resolution process they have agreed to before commencing litigation. The judiciary’s starting position is that parties should be held to their bargain and follow the agreed-upon steps for resolving conflicts.

This principle was affirmed by the Supreme Court of Queensland in Santos Limited v Fluor Australia Pty Ltd [2016] QSC 129. In this case:

• The court granted a stay of proceedings, reinforcing that parties must adhere to their contractual ADR mechanisms.
• The court will only allow a party to bypass the agreed process if compliance is “obviously futile.”
• A desire for a faster resolution through litigation was not considered a sufficient reason to sidestep the contract’s requirements.

Commerciality: Ensuring the Clause is Practical & Business-Like

Dispute resolution clauses must be drafted with precision to ensure they are practical and avoid commercially unworkable outcomes. The clause should reflect a sensible, business-like process that the parties have intentionally chosen to manage potential conflicts arising from their contract.

In Lipman Pty Ltd v Empire Facades Pty Ltd [2017] NSWCA 217, the court upheld a clause because it reflected the specific process the parties had expressly agreed upon. The court noted there was “nothing unbusinesslike” about enforcing the mechanism, which in this instance permitted litigation after an appeal of an expert determination. This decision underscores that courts will give effect to a clause that is commercially sensible and clearly outlines the parties’ intentions.

What Happens When a Dispute Resolution Clause is Breached

The Court’s Power to Stay Proceedings

When a party initiates litigation without first following an agreed-upon dispute resolution process, the most common judicial response is to order a stay of proceedings. This action effectively pauses the court case, compelling the parties to adhere to the mechanism outlined in their contract.

A court may grant a stay to enforce the clause and ensure the parties follow the procedure they originally agreed to.

The power to grant a stay is discretionary rather than automatic.

Courts rely on different sources of authority depending on the type of dispute resolution chosen:

• For arbitration clauses, the power to stay proceedings stems from statutory provisions.
• For mediation, conciliation and other processes, the court turns to its inherent jurisdiction to manage its own procedures and uphold contracts.

Besides a stay, courts occasionally consider other, less common remedies:

• Damages for a lost opportunity, although rare because the loss is hard to prove.
• An order of specific performance, compelling participation in the process, which Australian courts are highly unlikely to grant.

A Look at the Kajima Construction v Children’s Ark Case

The case of Kajima Construction Europe (UK) Ltd v Children’s Ark Partnership Ltd [2023] EWCA Civ 292 stands as a significant example of judicial treatment of breached clauses.

It centred on fire-safety defects in a hospital redevelopment, with a contract that set out a multi-step dispute resolution provision.

As the 12-year contractual limitation period neared its end, Children’s Ark Partnership Ltd (CAP) commenced legal proceedings to protect its position but simultaneously requested a stay so the agreed process could continue.

Kajima argued that CAP had breached the clause by starting litigation and asked the court to strike out the claim. The High Court concluded the provisions were too uncertain to be enforceable yet preferred to stay the proceedings rather than dismiss them.

The Court of Appeal upheld that approach, offering these key insights:

• Enforceability requires clarity: a clause must be clearly defined; the Kajima process was unworkable and vague.
• A stay is a discretionary remedy: its use depends on the facts, and here the court exercised discretion even though it might remove Kajima’s limitation defence.
• The claimant’s conduct matters: CAP’s actions were treated as sensible given the imminent limitation deadline and their acknowledgement of the agreed procedure.

A Checklist for Drafting an Enforceable Contract Clause

Define the Scope & Process with Precision

To ensure a dispute resolution clause is enforceable, it must clearly define the types of disputes it covers. The language you choose determines whether the scope is narrow or broad, so be specific.

For example, you might adopt a narrower scope by covering “any dispute arising out of the contract,” or a broader one by extending to “any dispute, difference, or question arising out of or in connection with this agreement.”

The clause should also establish a specific and mandatory process for resolving conflicts. A vague clause that needs further agreement on the method will likely be unenforceable.

These steps must be a precondition to commencing court proceedings, and the process should be detailed from the initial notice through to final resolution. Key procedural elements to include are:

• The method for issuing a notice of dispute.
• Timelines for each stage of the process.
• Procedures for gathering information and submissions from each party.
• What happens if a party does not comply with the process.

Detail the Appointment of Experts & Allocation of Costs

An enforceable clause needs a clear procedure for appointing the neutral third party. The contract must specify how the mediator, arbitrator, or expert will be chosen to avoid later disagreement and ensure a transparent appointment process.

Furthermore, the clause must address the allocation of costs for the dispute resolution process. In particular, you should spell out:

• Fees of the appointed expert, including how and when they are to be paid.
• Responsibility for other associated expenses, such as venue hire or document production.

Address Ongoing Performance & Post-Termination Survival

Include a provision clarifying the parties’ obligations regarding the ongoing performance of the contract while a dispute is in progress. This keeps essential business activities running instead of stalling during resolution.

The clause should also state whether it survives the termination of the contract. This ensures the agreed dispute-resolution mechanism remains enforceable even after the main agreement ends, providing a consistent path for any lingering issues.

Conclusion

Dispute resolution clauses are crucial in a contract for managing conflicts, but their enforceability hinges on clear, specific, and commercially sensible drafting. To be effective, these provisions must outline a certain process, as courts expect compliance and may stay proceedings if the clause is breached.

To ensure your contracts are protected by a robust and enforceable framework, it is vital to get the drafting right from the outset. For trusted expertise in creating and interpreting these clauses tailored to your specific needs, consult with PBL Law Group’s commercial and business lawyers for a comprehensive consultation today.

Frequently Asked Questions