This is the third article of the series by Commercial Litigation specialist, Toby Boys in which he looks at the practical application of Alternative Dispute Resolution (ADR) systems and the critical role they play in the commercial world.
In the first article, we looked at the issue of Dispute System Design, which involves representatives of an organisation identifying potential sources of disputes in an organisation and implementing systems to resolve those disputes before they run out of control.
In the second article, we looked at the role of an independent person who can facilitate discussions between parties, help them to resolve their differences and get back to business.
This article will explore the Alternative Dispute Resolution (ADR) clauses that are increasingly common in today’s commercial contracts and examine several key issues that you need to be aware of in negotiating and drafting contracts.
What is an ADR clause?
An Alternative Dispute Resolution (ADR) clause is any provision in a contract by which parties agree that they will seek to resolve disputes using ADR processes.
Typically an ADR clause will involve a requirement for parties to give notice of the dispute and then undertake processes to resolve this dispute by consensus. These processes might include senior executive negotiations or mediation.
Where parties cannot resolve the dispute themselves, ADR clauses will often then provide for a determinative ADR process, such as expert determination or arbitration. This will lead to the involvement of an independent third person to resolve the dispute.
Why use an ADR clause?
ADR is used to try and resolve disputes without the need for litigation. Litigation is expensive, stressful and time-consuming. The process can also be very damaging to an organisation, its people and its relationships with internal and external stakeholders.
ADR clauses can therefore be a powerful expression of the parties’ agreed mutual desire to consult and negotiate, rather than litigate.
What types of ADR processes are being used?
There are various kinds of dispute resolution processes, but the most common ones are:
- Senior executive negotiation – senior executives from each party attend a ‘without prejudice’ settlement conference to try and resolve the dispute by a settlement agreement;
- Mediation – the parties attend a ‘without prejudice’ settlement conference chaired by an independent mediator. The mediator facilitates the discussion and assists parties to resolve the dispute by a settlement agreement;
- Expert determination – the parties agree to appoint an expert to make a decision or determination to resolve the dispute. The ADR clause should specify whether the expert’s decision is binding or non-binding upon the parties;
- Arbitration – parties agree to appoint one or more arbitrators to arbitrate, and thereby resolve, the dispute. Arbitration is usually conducted in private and remains confidential to the parties. Arbitration legislation means the arbitral award is binding upon the parties.
The parties can choose what disputes will be covered by the ADR clause. For example, parties might agree that the ADR processes will be used for all disputes that arise under the contract, or define that ADR processes will only be used for particular types of disputes.
Similarly, parties can also define which consensual or determinative ADR processes will apply when certain disputes occur.
Ultimately, parties should consider and agree upon a clear process that is tailored to each organisation’s needs, rather than use a generic or pro forma ADR clause.
Is the ADR clause properly drafted?
Like any other contract clause, if an ADR clause is not properly drafted it may be void for uncertainty, and will therefore be unenforceable.
A generic clause that simply directs parties to attempt to agree to an ADR process or does not outline a clear process for attempting to resolve a dispute will not be upheld.
As an example of poor practice, in WTE Co-Generation & Anor v RCR Energy & Anor [2013] VSC 314, the ADR clause required both parties to enter into an agreement to agree to another agreement:
“In the event, the parties have not resolved the dispute then within a further 7 days a senior executive representing each of the parties must meet to attempt to resolve the dispute or to agree on methods of doing so.”
Ultimately, the Court found this to be unenforceable because it was uncertain. It did not prescribe any process or model to be followed by the parties beyond the initial conference.
To be binding, this ADR clause should have clearly outlined the process and next step in the dispute resolution procedure.
A best practice example might have outlined that mediation would be the process, and set out how the mediator will be chosen, who will pay what fees, and what the procedure would be for the mediation process.
What happens if an enforceable ADR clause is not used and litigation occurs?
If an ADR clause is properly drafted and enforceable but litigation occurs, the courts may suspend any litigation that commences before the ADR processes have been undertaken.
In 2018, the Queensland Supreme Court recognised the importance and enforceability of ADR clauses in Hooks Enterprises Pty Ltd v Sonnenberg Pty Ltd [2018] 1 Qd R 116.
In that case, the parties entered into a development management agreement. A dispute arose and the plaintiff, Hooks Enterprises, commenced an action in the Supreme Court.
Its abridged ADR clause (Clause 12) is as follows:
- 12.2 If a party asserts that a dispute exists between the parties arising out of or in connection with this Agreement, the party can give a Notice of Dispute to the other party…
- 12.3 Within seven (7) days of receipt of the Notice of Dispute, the other party must provide a Notice of Response stating its position in relation to the dispute…
- 12.4 Within seven (7) days of receipt of the Notice of Response, the parties must take reasonable steps to resolve the dispute.
- 12.5 Either party may refer the dispute for expert determination pursuant to this clause if the dispute is not resolved in the period referred to in clause 11.4.
The defendant applied to stay the proceeding, pending completion of the clause 12 requirements. However, the plaintiff argued the proceeding should not be stayed, arguing that the dispute resolution procedure in clause 12 was not mandatory in that it did not expressly bar a party from commencing legal proceedings while the procedure is engaged.
The defendant argued that the ADR clause should be read as mandatory once a party embarks upon it.
His Honour Justice Daubney summarised the effect of clause 12 as follows:
‘Clause 12 is couched in permissive language. A party who “asserts” the existence of a dispute “arising out of or in connection with” the DMA “can” give a notice of dispute, to which a notice of response “must” be provided by the other party within the given timeframe. The parties “must” then take reasonable steps to resolve the dispute within the given timeframe. If this is not successful, a party “may” then refer the dispute to expert determination’.
In granting the stay, Daubney J held:
“Here, a notice of dispute has been given and the procedure has been embarked upon. There is no doubt that a response to the notice of dispute is mandatory, as indicated by the word “must” in clause 12.3. It follows that the plaintiff is bound to respond and participate in the procedure, and its failure to do so is a breach of its agreement with the first defendant to decide the dispute in accordance with clause 12”.
In this case, the plaintiff had bargained for disputes to be resolved in the form outlined in Clause 12 and there was no good reason why it should not be held to that agreement.
A growing reliance on ADR clauses in commercial contracts reflects the perspective that ADR processes allow for a more efficient and fairer resolution to disputes. Ultimately, parties that can genuinely engage in private negotiations in good faith over heading straight for adversarial litigation have a better chance of reaching favourable resolutions, preserving relationships and avoiding significant damage.
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