A reminder on the necessity of compliance with dispute resolutions clauses

The Queensland Supreme Court decision of Santos Limited v Fluor Australia Pty Ltd [2016] QSC 129 provides another reminder of the need for contracting parties to comply with a dispute resolution clause before issuing legal proceedings.

The view that an alternative dispute resolution process in a contractual clause will be unlikely to resolve a dispute between the counter-parties is not a relevant consideration. It cannot be relied upon as a justification for skipping the clause and proceeding straight to litigation. [1]

Facts

• Santos Limited (Santos) engaged contractor Fluor Australia Pty Ltd (Fluor) on a coal seam gas project under an agreement (Contract).  The Contract was amended and converted into a costs reimbursable contract subject to various conditions.

At project’s end, Santos was concerned Fluor had claimed costs which were expressly excluded under the Contract.  To get an adjudication on the point, Santos applied to the Queensland Supreme Court for orders enabling Santos to access Fluor’s records to review the costs Fluor had charged.  Fluor responded by applying to the court for a stay of Santos’s application pending the parties complying with the dispute resolution process provided for under the Contract (DR Clause).

The DR Clause required a dispute between the parties to be dealt with under the DR Clause. The first step was for a dispute notice to be issued.  The party receiving a notice was required to respond within 10 business days; the party representatives were to try and resolve the dispute in that time period.  If there was no resolution at that point, either party could refer the dispute to their respective dispute resolution representatives for resolution.  If that process did not produce an outcome, then the parties could, by agreement in writing, attempt to resolve the dispute by conciliation, mediation, expert determination or some other form of dispute resolution before commencing litigation proceedings in relation to the dispute.  Only after those steps were exhausted could a party refer the dispute to litigation.

Santos did not invoke the contractual dispute resolution process.  Santos argued that compliance with the DR Clause, or at least the early stages under it, was not necessary as the parties had exchanged sufficient correspondence on the matter in issue which made it clear that a written notice and response, and subsequent meeting, would be “impractical or useless”.

Decision

The Queensland Supreme Court found that the DR Clause needed to be enforced and complied with by the parties.  The Court ordered that there should be a stay of the proceedings commenced by Santos pending compliance with the DR Clause.[2]

The basis for this decision was two-fold;

• Compliance with the DR Clause would not prejudice either party, nor deprive them of their right to have a claim judicially determined if the initial dispute resolution procedure under the Contract failed to lead to a resolution.[3]
• Enforcement of the DR Clause was found to advance a public interest in holding parties to previously agreed terms, and avoiding “the potentially unnecessary use of court time and reducing the costs of civil litigation to both the public and litigants”.[4]

The Court reaffirmed that contracting parties must be held to pre-agreed dispute resolution clauses in initially attempting to resolve a dispute, unless:

• the “justice of the case” is against the stay of the proceedings; and
• the parties can demonstrate a good reason why the matter should bypass such clauses and proceed straight to court.[5]

A party seeking to circumvent a dispute resolution clause bears a heavy onus to prove to the court that compliance with the clause is a “completely hopeless or futile exercise”, and the better course of action is to proceed straight to litigation.[6]

The Court noted further that even partial compliance with the DR Clause was not sufficient. The correspondence between Santos and Fluor about the dispute and their respective positions was not an adequate substitute for the face-to-face meetings required by the early stages of the dispute resolution process in the Contract.  The court declined to dispense with any part of the process set out in the DR Clause.  Santos’s argument that the correspondence demonstrated that the process in the DR Clause would not successfully resolve the dispute was not enough in and of itself to satisfy the court that enforcing the clause would be pointless and so should be by-passed.[7]

Lavan comment

This case reaffirms a general approach by the courts in holding parties to the dispute resolution clauses in their contracts before permitting a dispute to be subjected to the litigation process. This highlights the importance of ensuring that both:

• the drafting of dispute resolution clauses in contracts is not overlooked, but given sufficient consideration to ensure its terms adequately meet the needs and intentions of the parties, as the courts show a strong tendency for such clauses to be enforced; and
• a contractual dispute is first dealt with under the dispute resolution clause before time and money is incurred in preemptively (and wastefully) attempting litigation.