Is a Dispute Resolution Clause an enforceable term of a contract?

Posted on in Contract, Dispute Resolution

Contract Dispute Resolution ClauseA contract should have a Dispute Resolution (DR) clause. An effective DR clause is a term of the contract in which the parties agree in advance to a mechanism for resolving a dispute. The DR clause may provide for expert determination or arbitration or mediation as a condition before pursuing legal proceedings in a court.

The minimum requirements for a DR clause to be enforceable were summarised in Aiton Australia Pty Ltd v Transfield Pty Ltd (Aiton Australia)[1] as follows:

  • It should operate to make completion of mediation [or other methods of dispute resolution] a condition precedent to commencing court proceedings. That is, there is a postponement of the parties’ rights to litigate until the completion of the dispute resolution process: Aiton Australia. [2]
  • The process established by the clause must be sufficiently certain. There cannot be stages in the process where agreement is needed on some course of action before the dispute resolution process can commence. This would amount to no more than an ‘agreement to agree’: Booker Industries Pty Ltd v Wilson Parking (Qld) Pty Ltd. [3]
  • The administrative process for selecting the mediator and their remuneration should be included in the clause and in the event that the parties cannot agree a mechanism for a third party to make the selection necessary; and
  • The clause must set out in detail the process to be followed or incorporate these rules by reference. These rules will also need to state with particularity the mediation model that will be used.

A DR clause cannot oust or exclude the jurisdiction of the courts: Aiton Australia.[4] Thus a DR clause that purports to prohibit a party from commencing legal proceedings and only allows them to participate in say arbitration may be unenforceable.

The DR clause should be precisely drafted and clearly define the mechanism and process for resolution of the dispute. Otherwise the clause may constitute an ‘agreement to agree’ and will not be enforceable as a term of the contract: WTE Co-generation and Visy Energy Pty Ltd v RCR Energy Pty Ltd & Anor [5]

Furthermore, the DR clause should be drafted after considering the nature of the contract, the particular needs of the parties, the types of disputes that can occur and the likely commercial consequences of such a dispute. [6]

In summary, a DR clause can be an enforceable term of a contract. This means that if a party to a contract does not follow the dispute resolution mechanism as stipulated in the DR clause they may be in breach of contract.

This article is made available by David J Lee Mediation Services for educational purposes and only to provide general information about alternate dispute resolution such as mediation. This article must not be relied upon as a substitute for professional legal advice from an Australian Legal Practitioner.

In the next article we will consider the DR processes as required by legislation.

[1] [1999] NSWSC 99 at [69] per Einstein J.
[2] [1999] NSWSC 99 at [43].
[3] (1982) 149 CLR 600 at 604.
[4] [1999] NSWSC 99 at [43].
[5] [2013] VSC 314.
[6] ADRAC Toward Accord “DR Clauses in Contract” 14 Sept 2016.