Parties to a construction contract usually have admirable intentions when negotiating the inclusion of a dispute resolution clause.
Instead of allowing conflicts to escalate, parties aim to resolve matters and avoid a costly courtroom showdown.
However, when dispute resolution clauses are poorly drafted or ambiguous, they might do the very thing they intend to avoid; landing you in litigation. Drafting dispute resolution clauses precisely and with clarity can be the difference between one day in mediation or several months in front of a judge.
When the Dispute Clause Becomes the Dispute
Alternative dispute resolution methods are designed to save costs and ideally, preserve commercial relationships. However, when a dispute resolution clause lacks clarity, the process itself may become the dispute. Parties can end up spending valuable time & money on legal fees, arguing over whether mediation is required before litigation can begin. This distraction about process can prevent the actual issue in dispute from being resolved.
Poorly drafted clauses may favour parties who have the resources to stall a dispute, exploiting the ambiguity in a clause to drag their feet and create significant delays to the actual construction project. In an industry where cash flow is critical, construction companies cannot afford unnecessary delays to projects & cash flows.
Additionally, if a matter proceeds to litigation and a clause is ruled unenforceable, any effort spent trying to comply may be largely wasted.
Ambiguity Is Expensive
So, not all dispute resolution clauses are created equal. In our experience:
Vague obligations create real problems
How are parties able to quantify whether they’ve attempted to “resolve disputes amicably” or “meet and discuss in good faith”? Subjective language may create confusion. You can’t expect to resolve a dispute if you can’t even settle on what “resolving” means.
No process, no progress
Failing to include specific steps or deadlines for each stage of the resolution process can lead to further conflict. Clauses stating that “parties will negotiate before litigating” may create disagreement about whether that obligation has actually been satisfied. One party may argue the process was abandoned too early, while the other may claim a single meeting was sufficient. Without clear timeframes (e.g., “parties must meet within 14 days of a dispute notice”) it is unclear when it is necessary to progress to the next step.
The “agree to agree” trap
Requiring parties to “agree on a method of resolving the dispute” or leaving critical process details to future arrangement may be a recipe for disaster. For example, in WTE Co-Generation v RCR Energy Pty Ltd [2013] VSC 314, the Victorian Supreme Court contemplated the following clause:
“a senior executive representing one of the parties must meet to attempt to resolve the dispute or to agree on methods of doing so”.
In practice, this clause meant that the parties, already at odds, would have to jointly devise a process for resolution. When one side sought to stay the court proceedings pending compliance with this clause, the Judge ultimately found that the clause was hopelessly ambiguous and therefore unenforceable. The Court ruled that a valid dispute resolution clause must, at minimum, “set out the process or model to be employed, and in a manner which does not leave this to further agreement”. Ultimately the parties were forced to proceed with litigation due to a poorly drafted dispute resolution clause.
Clarity is king
When drafting a dispute resolution clause, your focus should be on clarity. Leave no room for confusion or ambiguity. Some practical questions to consider when negotiating dispute clauses include:
What is the process
Lay out a specific procedure for resolving disputes, step by step. A common procedure to follow is to require a written dispute notice, then a meeting between senior executives within a set time frame, such as 7 or 14 days. If unresolved, a formal mediation within a set timeframe might be the next step or proceeding to litigation/arbitration/expert determination. Each tier of the dispute resolution should have a defined time limit or trigger to move to the next stage.
What is the scope?
Explicitly state which disputes the clause covers (e.g., “any dispute arising under or in connection with the Contract”) and state that following the dispute resolution process is a condition precedent to litigation, arbitration etc.
Is there a risk or deadlock?
Do not leave any essential part of the dispute process to future agreement or discretion. Detail each and every step, such as how a mediator will be chosen or an appointment method for an expert. Never say “the parties will agree on a process” without providing a default process if the parties don’t agree.
The Clause Should Prevent Disputes – Not Create Them
Having well drafted dispute resolution clauses in your construction contracts can be the difference between successful project delivery, or years spent in and out of court.
If you are currently negotiating a contract or facing an uncertain resolution process, get in contact with our team.
