To Arbitrate, Negotiate or Litigate – How an Arbitration Clause will decide that for you

The drafting of a contract typically occurs at a time when parties are focused on commercial opportunities and the prospects of a successful agreement, and not what will happen if things don’t go to plan. But things can and do sour in commercial agreements. Where the substantive contract becomes invalid, non-existent or terminated, an arbitration clause in a contract may become severable from a substantive contract and can be deemed a standalone agreement regulating parties’ rights and obligations.

It is a common occurrence that a narrowly focused pre-contractual emphasis can lead to costly disputes. A standard arbitration clause bolted to a contract can bypass what could be a helpful and useful different dispute negotiation tool, and instead provide delays and undue costs in solving an issue at hand. Anticipating how to deal with disputes that may arise is an important aspect of contracting.

A survey was recently conducted on arbitrations commenced, conducted and concluded between 2017 and 2019 and was reported in the Australian Arbitration Report (9 March 2021). It illustrated the main reasons solicitors include an arbitration clause for a client, being: confidentiality, cost and enforceability.² The ACICA recommends an arbitration clause be broad and a ‘catch-all’ provision such as; the clause will apply to "any dispute, controversy or claim arising out of, relating to or in connection with this contract".³

Here are some advantages and disadvantages of ‘catch-all’ arbitration clauses.

Advantages

Upon a breach of a contract, or where a contract is terminated, the arbitration clause is its own contract, independent of the underlying contract in which it is contained.⁴

An arbitration clause will force parties to arbitrate and restrict the parties from being able to litigate. In Roy Hill Holdings Pty Ltd v Samsung C&T Corporation [2015] WASC 458 the court held that regardless of the urgency of a dispute, where the contract provides for an arbitration clause, the parties are bound to comply. The parties therefore know the dispute regime and can, by the clause, tailor the regime.

Disadvantages

The disagreement must fall within the scope of the arbitration agreement and arise out of the scope of the contract to be effective. In Amcor Packaging (Australia) Pty Ltd v Baulderstone Pty Ltd [2013] FCA 253 the arbitration agreement stated the clause comes into action from a dispute arising “out of” or “in connection with” the agreement.  It was held to be a clause intending a wide interpretation with “a reach of some width of liberality⁵.  This means that if the disagreement is outside the scope of the agreement the arbitration clause cannot be relied upon.

An arbitration clause is exactly that. It will restrict parties wanting to litigate in the courts, as the clause provides the parties must arbitrate. This may result in costing parties more in the long run if they don’t follow the clause. Court proceedings taken may be stayed and the matter sent to arbitration.  In Australian Maritime Systems Ltd v McConnell Dowell Constructors (Aust) Pty Ltd [2016] WASC 52 a dispute arose in relation to an agreement. The parties executed a supplemental agreement to solve the dispute. The plaintiff commenced an action saying that the supplemental agreement discharged that of all obligations and liabilities to the defendant under the agreement. The court held that the arbitration agreement was still on foot and the parties would need to arbitrate. Without careful drafting of a clause/contract an agreement may not be enforceable or alternatively a superseded clause/contract may still be enforceable.

Options

1. Avoid vs Amend
If a party wishes to litigate and would prefer not to arbitrate, they should avoid, or restrict any arbitration clauses in any agreement or alternatively amend existing agreements to suit.

2. Optional vs Mandatory
An optional arbitration clause in Australia will most likely favour alternative dispute resolution routes as opposed to litigious routes. The reason for this is because arbitration is a consensual agreement and therefore the Court is reluctant to intervene. It is assumed that the parties have mutually agreed on an arbitration clause included in a contract regardless of the inclusion of wording such as ‘may’ or ‘not required’, and likely the court will require the parties to arbitrate. See Pipeline Services WA Pty Ltd v ATCO Gas Australia Pty Ltd [2014] WASC 10.⁶

Lavan Comment

The Commercial Arbitration Act 2012 (WA) provides guidelines for the administration of arbitration processes.

The express and prevailing benefit of arbitration is it is confidential. Additionally, the awards granted are generally not published to the public and arbitration can be cost effective when the parties give thought to how to structure the arbitration of the dispute. Arbitration can be more cost effective when thoughtfully conducted as it can eliminates some of the cost associated with traditional litigation. A final benefit of arbitration is that it can attract shorter time frames, opposed to that of litigation and therefore can be more attractive than the lengthy court processes of litigation.

However, it is important to remain mindful that arbitration can often be conducted in a similar form to litigation, such as with legal representation and procedures, and when parties are simply following court processes, the time frames and costs associated can be significantly increased over other forms of arbitration or dispute resolution.

Lavan can draft appropriate arbitration clauses and/or contracts  which are tailored to suit your individual needs and desired dispute resolution needs.

If you have any queries in relation to this article please contact The Litigation and Dispute resolution team at Lavan.