The recent case of Hooks Enterprises Pty Ltd v Sonnenberg Pty Ltd1 recently considered whether a party must comply with the dispute resolution clause contained in an agreement to which it was a party.
In December 2012, Hooks Enterprises Pty Ltd (Hooks) entered into a ‘Development Management Agreement’ (DMA) with Sonnenberg Pty Ltd (Sonnenberg) by which Sonnenberg was to provide various services to Hooks. Broadly, Sonnenberg was to obtain development approval to build a fast food or convenience store on Hooks’ property, and to assist with construction of that development.
An alternative dispute resolution clause (ADR clause) in the DMA set out a procedure by which disputes arising out of or in connection with the contract were to be determined by an independent expert. The ADR clause was to survive termination or invalidity of the DMA. A determination of an independent expert under the ADR clause was to be final and binding on the parties.
In September 2016, Hooks terminated the DMA. No tenancies had been secured for Hooks’ property, and because the final design of the project construction had not been finalised.
Hooks sued Sonnenberg for damages for breach of contract in the sum of $2,219,379 and, in the alternative, for damages under the Australian Consumer Law alleging misleading and deceptive conduct.
Sonnennberg applied for a stay of Hooks’ action on the basis that clause 12 of the DMA required the ADR process to be followed before a claim in connection with the DMA could be litigated. Sonnenberg contended that the ADR/expert determination process should be activated when regard was had as to:
Hooks contended its Supreme Court action should not be stayed as:
The Queensland Supreme Court found that the proceeding should be stayed pending the completion of the ADR/independent expert process procedure set out in the ADR clause.
In arriving at its decision, the court referred to Zeke Services Pty Ltd v Traffic Technologies Ltd2 (a case where there was no express provision limiting the ability of the party to commence proceedings pending the outcome of the expert determination) in finding that “there is an undoubted jurisdiction to stay a legal proceeding where the parties have by contract agreed that their dispute shall be determined by means other than curial adjudication”.3 The observation of Wheeler JA in Straits Exploration v Murchison United NL4 at 193 was also cited with approval:
"Where a contract contains a dispute resolution clause, and a party who has not first proceeded in accordance with that clause sues on the contract, the court has, however, a jurisdiction to stay the proceeding so as, in a practical sense, to force the party to fall back upon the contractual procedure."
The court found that:
The court was not persuaded by Hooks’ contention that the DRC was to be read as giving only Hooks the option to commence the ADR procedure under the ADR clause. Neither did the ADR clause provide that a party had to first agitate the dispute in order to provide a notice of dispute. Therefore the court was not convinced that Hooks had fulfilled its onus of establishing why a stay should not be granted.
The court was satisfied that Sonnenberg had a right to commence the ADR procedure under the ADR clause.
Before commencing legal proceedings against a counterparty to a contract it is important that you are aware of the terms that survive termination, and in particular whether an ADR clause falls within them.
A contracting party should seek legal advice in relation to any alternative dispute resolution clause in the contract and whether it has the capacity to apply a handbrake to litigation in the event the counterparty initiates the ADR procedure in the agreement.
Issuing court proceedings in such a case may see you forced to fall back upon the contractual ADR procedure and face a potential application against you for a stay of your court action until the ADR process has run its course.
