Just How Important Are Dispute Resolution Clauses?

Just How Important Are Dispute Resolution Clauses?

The recent Queensland Supreme Court decision in Santos Limited v Fluor Australia Pty Ltd[2016] QSC 129 demonstrates how parties to a commercial agreement have an obligation to follow dispute resolutions clauses, no matter how futile they may first seem.

The Facts

Santos Limited (Santos) and Fluor Australia Pty Ltd (Fluor) entered into a project which involved the extraction and processing of coal seam gas and its exportation to Curtis Island near Gladstone, Queensland. The contract commenced in early 2011, but its terms were later amended so that the consideration payable to Fluor were the actual costs plus any fees and incentives which it was entitled to.

At the completion of the projection, Fluor had claimed over $1.85 billion more than budget estimates. Accordingly, Santos exercised its rights under the contract and sought to access Fluor’s records to confirm that Fluor was in fact entitled to claim the costs it was paid. Fluor opposed this, so Santos filed an application seeking an order that Fluor provide access to the requested documents. Fluor sought a stay of the application on the basis that the dispute resolution process under the contract had not been followed.

The Dispute

The contract included a complex dispute resolution clause which, importantly, required representatives of the companies to engage in meetings before commencing litigation. Santos did not invoke the contractual procedure and instead filed an application with the court.

In doing so, Santos argued that the correspondence between the parties made it clear that carrying out the dispute resolution meetings would be impractical and useless. Santos also argued that the dispute resolution procedure had failed to assist the parties in resolving previous disputes and as such, Santos believed staying the proceedings would only further delay resolution of the dispute. Counsel for Santos further alleged that because the dispute related to technical legal issues, the dispute ought to be determined in court rather than through compromise.

Fluor’s position was that the prior failure of the parties to resolve disputes did not mean that the dispute resolution clause should not be followed. Indeed, the meetings were likely to have influenced the settlements and also would have utility in narrowing the scope of the dispute.

The Decision

The court held that the dispute resolution procedure was undoubtedly enforceable. Accordingly, the court ordered a stay of proceedings pending the performance of the parties’ obligations under the dispute resolution clause.

The court confirmed previous authorities that the parties should be held to their bargain in resolving disputes prior to commencing legal action, unless the justice of the case so requires. Ultimately, Santos was unable to persuade the court to allow the dispute resolution clause to be avoided. The parties did not demonstrate any inability to adhere to the dispute resolution procedure, and it was in the public interest to avoid the potentially unnecessary costs and expenditure of court time and resources.

What does this all mean?

The courts are reluctant to dismiss the importance of dispute resolution clauses agreed to between parties in contracts, and such procedures cannot be avoided save for in exceptional circumstances. This case further shows that dispute resolution clauses will be enforceable irrespective of the fact that the mechanism may have failed to resolve previous disputes between the parties, or whether it is seen by the parties as futile or delaying the prompt resolution of the dispute.

Importantly, at the outset of a transaction, parties should consider whether the dispute resolution clause is appropriately drafted to meet the parties’ needs, expectations and commercial realities.