Are Dispute Resolution Clauses Binding?

It is common practice to include dispute resolution terms in commercial agreements. Such terms provide parties with a road map to follow in the event a dispute arises under the agreement.

In a decision of the Supreme Court of Queensland in 2016 in the case of Hooks Enterprises Pty Ltd v Sonnenberg Pty Ltd & Ors, the Court held that the parties must comply with the dispute resolution terms and the process contained therein, even if compliance is not a condition precedent to commencing litigation.

The Facts

Hooks Enterprises Pty Ltd (“Hooks Enterprises”) and Sonnenberg Pty Ltd (“Sonnenberg”) entered into an agreement in 2012 (“the Agreement”). Sonnenberg was required to obtain development approval and oversee construction of a fast food convenience store. Hooks Enterprises terminated the contract in 2016, alleging that Sonnenberg had not fulfilled its obligations under the Agreement.

Hooks Enterprises initiated court proceedings in an attempt to have the dispute resolved or otherwise determined by the court, despite the fact that the Agreement contained a dispute resolution terms. The terms provided:

  1. Either party can give a Notice of Dispute if a dispute arises;
  2. The recipient of the Notice must then provide a Notice of Response;
  3. The parties are required to take reasonable steps to resolve the dispute within 7 days of the Notice of Response; and
  4. Either party may refer the dispute for expert determination if the dispute is not resolved.

There were several other provisions contained in the Agreement which set out the process for appointing an expert.

Hooks Enterprises sought damages for breach of contract. In accordance with the dispute resolution clause of the Agreement, Sonnenberg issued a Notice of Dispute to Hooks Enterprises. In response, Hooks Enterprises maintained that the court was the appropriate forum to resolve the dispute. Sonnenberg applied to stay the proceedings until the parties had undergone the processes provided for in the dispute resolution terms of the Agreement.

Hooks Enterprises’ main arguments against staying the proceedings were:

  1. That the dispute resolution clause in the Agreement was not mandatory and did not expressly prevent a party from commencing court proceedings; and
  2. That is was not appropriate for the dispute to be referred for expert determination because the dispute resolution terms in the Agreement were without safeguards or supervision from the court.

Court’s Decision

The Court ordered the court proceedings stayed.

With respect to Hooks Enterprises’ first argument, the Court held that once a party issued a Notice of Dispute, the process for resolving the dispute by expert determination became mandatory. Although the Agreement did not expressly prohibit a party from initiating court proceedings, the Court held that the parties should nevertheless be held to their agreement to resolve their dispute in the manner prescribed in the Agreement.

In response to Hooks Enterprises’ second argument, the Court took the view that the dispute resolution clause did incorporate adequate safeguards in that it required:

  1. The President of the Queensland Law Society to appoint the expert; and
  2. The expert to abide by the principles of procedural fairness and natural justice.

It is apparent from this case that the Court will uphold a dispute resolution clause to which parties have agreed in commercial agreements. That is so even if it is not expressed to be a mandatory precursor to litigation. If parties to an agreement intend to proceed directly to litigation, then their agreement should be clearly drafted to reflect this.

Meghan Warren specialises in providing legal advice and services in the medical and healthcare industry particularly in the areas of business, commercial, litigation and dispute resolution. Contact Meghan Warren, Director and Senior Associate of Burke & Associates Lawyers on mwarren@burkes-law.com or (03) 9822 8588.