Many contracts include a clause providing a mechanism for dispute resolution. Generally, these clauses provide for a staged progression of a dispute. For instance, the stages might be:
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Written notification of a dispute;
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A requirement for the representatives to meet or confer within a short period of time after the issue of a notice of dispute in an attempt to resolve the dispute;
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If the dispute cannot be resolved, referral to mediation or arbitration.
It is common for dispute resolution clauses to only allow a party to approach a Court in urgent circumstances.
What happens if a party ignores or refuses to comply with the dispute resolution clause? Can a party by-pass that clause and commence a Court proceeding anyway?
In February 2016, the Supreme Court of Western Australia sent a clear message to parties that you must comply with a dispute resolution clause.
In Australian Maritime Systems Ltd (AMS) v McConnell Dowell Constructors (Aust) Pty Ltd (McConnell) [2016] WASC 52, AMS commenced a Supreme Court proceeding against McConnell.
At the time that AMS commenced the Supreme Court proceeding, AMS had not followed the procedure in the dispute resolution clause. It had not issued a dispute notice and the parties had not met to confer in relation to the dispute. The dispute resolution clause provided that if those preliminary steps had been unsuccessful, the dispute would be referred to arbitration.
McConnell made an application to have the Supreme Court proceeding stayed until the contractual dispute resolution process had been completed. McConnell sought an order that the dispute be referred to arbitration.
AMS asked the Court to grant the stay in exercise of its own inherent jurisdiction or under section 8 of the Commercial Arbitration Act 2012 (WA). Section 8 says:
A court before which an action is brought in a manner which is the subject of an arbitration agreement must, if a party so requests not later than when submitting the party’s first statement of the substance of the dispute, refer the parties to arbitration unless it finds that the agreement is null and void, inoperative or incapable of being performed.
Section 8 of the NSW Commercial Arbitration Act is in substantially the same form.
AMS was unable to satisfy any of the exceptions in Section 8 of the Commercial Arbitration Act. As a result, the Court ordered a stay of the Supreme Court proceedings and referred the parties to arbitration.
Most likely, AMS would have been ordered to pay McConnell’s legal costs of seeking the stay application. Accordingly, the decision of AMS to ignore the dispute resolution mechanism and instead commence Court proceedings would have significantly delayed any potential resolution of the dispute and incurred significant and unnecessary legal costs.
Tips:
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Don’t skim over the dispute resolution clause in your contracts.
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Pay close attention to the dispute resolution clauses and how it might work in real life. Is it too complicated, cumbersome or too time consuming? Is your ability to bring an application in a Court severely limited?
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Get some legal advice on what types of dispute resolution mechanisms is best suited to your circumstances.
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If a dispute arises, carefully consider your contractual obligations before commencing any Court actions.
