05 July 2017

Do you need to comply with a dispute resolution clause in your contract before commencing proceedings?

Many contracts contain clauses requiring the parties to participate in an alternative dispute resolution process before commencing court proceedings.  When a contractual relationship between the parties falls apart, the aggrieved party will often prefer to commence proceedings without complying with the prescribed alternative resolution procedure first.  So the question is, do you need to comply?

A recent decision of the Supreme Court of Queensland of Hooks Enterprises Pty Ltd v Sonnenberg Pty Ltd & Others [2017] QSC 69 has examined this issue.

The parties entered into a Development Management Agreement in December 2012 for the construction of a fast food/convenience store on the plaintiff’s property.  By mid 2016 no tenancies had been secured and the design for construction of the project had not been finalised.  As a result, the plaintiff terminated the agreement in September 2016.

In November of that year, the plaintiff filed a claim and statement of claim seeking damages for breach of contract in excess of $2M.  The same day as being served with the claim, the defendants served a Notice of Dispute pursuant to the dispute resolution clause in the Development Management Agreement and filed an application seeking a stay of the court proceeding pending completion of that process.  It is important to note that the clause provided that it would survive regardless of the termination or validity of the agreement.  It also provided that upon receipt of a Notice of Dispute, a party must respond and must take reasonable steps to resolve the dispute.

One of the main issues for the judge was whether the wording of the dispute resolution clause provided that it was a mandatory process which precluded a court proceeding being commenced before undertaking that process.  On examination of the clause, the judge determined that the clause did not expressly provide a bar to the commencement of legal proceedings prior to the determination of alternative dispute resolution processes, but because the plaintiff had been served with a valid Notice of Dispute, it was required to comply with its contractual obligation to engage in that process before continuing with its proceeding.  As a result, the court proceeding was stayed pending completion of the dispute resolution process.

This decision reinforces the position that where a contract contains a dispute resolution clause, its effect will depend on the terms of the clause and the nature of the dispute.  Simply commencing proceedings without having regard to the dispute resolution procedure in your contract could easily put you in a position whereby you are required to defend a stay of proceedings application, wasting both time, and money.

For advice in relation to your individual circumstances, please do not hesitate to contact our Senior Associate, Melanie Husband on 07 4036 9700.

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