Dispute resolution clauses and reasonable endeavours obligations

more+
less-

This article aims to provide some useful contract drafting tips in the context of dispute resolution clauses, and clauses requiring parties to use best or reasonable endeavours. This article builds on lessons learned from recent cases in those areas, and provides a practical list of matters that should be considered when drafting or reviewing relevant clauses.

Dispute resolution clauses

Dispute resolution clauses recently came under the spotlight in the case of WTE Co-Generation v RCR Energy Pty Ltd [2013] VSC 314. This case served as a useful reminder of the need for a dispute resolution clause to set out the process or model to be employed by the parties in resolving disputes, and to do so in a manner that does not leave this to further agreement. Read more about this case.

Also a key point that was reinforced by Vickery J in WTE Co-Generation v RCR Energy Pty Ltd [2013] VSC 314 is that it is imperative to always ensure that a dispute resolution clause is sufficiently certain so as to be enforceable. Outlined below are our top tips to keep in mind when drafting or reviewing dispute resolution clauses.

  • Always include key dates or timeframes: It is important to specify dates by which, or timeframes during which, particular events must occur. It is particularly important for a dispute resolution clause to stipulate when each stage of the dispute resolution procedure will come to an end, and when the overall process will come to an end, so that it is clear when the parties can pursue their rights outside of the contract.
  • Avoid agreements to agree: The dispute resolution clause needs to set out the process that must be followed upon a dispute arising, and must do so with sufficient certainty so as to avoid it being simply an agreement to agree, which may not be enforceable. In any event, a party's refusal to agree would make an agreement-based dispute resolution procedure ineffective and inoperable. If the overall dispute resolution procedure involves multiple dispute resolution mechanisms (such as a meeting to attempt to reach agreement, mediation and arbitration), how each method is triggered must be agreed up front and spelled out in the contract. As Vickery J noted in WTE Co-Generation v RCR Energy Pty Ltd [2013] VSC 314 (and as was alluded to by Einstein J in Aiton Australia Pty Ltd v Transfield Pty Ltd [1999] NSWSC 996), the process does not necessarily need to be overly structured, but does need to be sufficiently certain so as to be enforceable.
  • Consider carve-outs: Dispute resolution clauses will often state that a party seeking urgent or interlocutory relief is not required to exhaust all dispute resolution mechanisms in the contract before pursuing its rights at law. Similarly, it might be worthwhile specifically mentioning that proceedings to enforce payment can be instituted without a party having to satisfy the dispute resolution procedure or, alternatively, a special 'payments dispute' process could be included. Also consider whether continued performance of the contract is required during the dispute resolution process, and if so, state that this is the case.
  • Ensure references to external bodies will operate as intended: Often a dispute resolution clause will provide for an external third party to resolve a deadlock between the parties. For example, if the parties cannot agree on a mediator or expert, the contract may provide for a third party to nominate an appropriate person. Always make sure that the third party exists, that it is correctly named, and that it will agree to do what is required under the terms of the contract. If any dispute resolution procedure is intended to be subject to standard form rules (for example, mediation rules adopted by a particular body), it is also important to consider whether these are sufficiently certain on all relevant points.
  • Always exercise caution in using the term 'good faith' in a dispute resolution clause: If used incorrectly, it may transform the provisions into an 'agreement to agree'. If using a reference to good faith, you may wish to spell out any requirements the parties must comply with, to ensure there is a readily ascertainable and objective measure or standard that applies. 
  • Sometimes less is more: It is important to always ensure that the relevant clause is sufficiently certain so as to be enforceable. Consider whether the inclusion of particular words may mean that a clause is less certain, and also consider whether the common law already achieves your desired outcome. For example, including an obligation to make diligent efforts may not necessarily add anything to obligations that would otherwise be implied at common law. 
  • On the other hand, never assume that a term will be implied: Always remember that the conditions necessary for a term to be implied into a contract (including that it is so obvious that it goes without saying) are very difficult to satisfy. Sometimes it is better to 'state the obvious' to avoid doubt. Some dispute resolution clauses are held to be unenforceable for lacking what some would consider to be a matter that goes without saying. For example, failure to specify how costs of a mediator will be apportioned between the parties.1
  • Always check cross-references: Whilst this might be an obvious tip, its importance cannot be overstated. There have been instances where a dispute resolution process was held to be inoperable and unenforceable due to an incorrect cross-reference, so it pays to always check these.

Best endeavours or reasonable endeavours

The High Court of Australia recently considered obligations to use reasonable endeavours, in the case of Electricity Generation Corporation v Woodside Energy Ltd [2014] HCA 7. Read more about this case.

Outlined below are our top tips to keep in mind when drafting or reviewing clauses requiring parties to use best endeavours or reasonable endeavours. Interestingly, there was also a recent case handed down by the Court of Appeal in Singapore (KS Energy Services Ltd v BR Energy (M) Sdn Bhd [2014] SGCA 16). Where relevant, we make some comments below, comparing the approaches taken in Australia and in Singapore.

  • Ensure consistent use of terms: It is generally accepted that there is little, if any, difference between the terms 'reasonable endeavours' and 'best endeavours'. Although the terms are largely interpreted in the same way, if it is intended that the relevant clause contain only one standard of performance, decide on one term and use it consistently. If both terms are used throughout a contract, a Court may consider that the parties intended for there to be two standards imposed on the parties, with 'best endeavours' usually imposing a more onerous standard of conduct on a party than 'reasonable endeavours'. 
  • Consider defining what a party is required to do to comply with its obligations: To avoid ambiguity as to whether a party has fulfilled its obligations, consider including specific examples of what that party is required to do. In particular:
    • Consider whether there are any industry or external standards that could be referred to, as an objective yardstick against which to measure the conduct of the party required to use best or reasonable endeavours.
    • Consider referring to the capacity, qualifications, experience or financial resources of the party required to use best or reasonable endeavours, again as an objective yardstick against which to measure performance. 
    • Consider including a description of the extent to which a party may have regard to its own interests (including commercial, economic or operational matters relevant to its business) and favour those, in preference to undertaking best or reasonable endeavours.
      This point was specifically considered in Electricity Generation Corporation v Woodside Energy Ltd [2014] HCA 7, with French CJ, Crennan, Kiefel and Gageler JJ finding that the use of reasonable endeavours does not necessarily mean that a party is required to forego or sacrifice its own business interests. Similarly, in the case of KS Energy Services Ltd v BR Energy (M) Sdn Bhd [2014] SGCA 16, it was held that a party can take into account its own interests in fulfilling the relevant obligation, and is not always required to sacrifice its own commercial interests. However, the party might be required to do so, where the nature and terms of the relevant contract indicate an agreed intention for the party to be required to sacrifice its own commercial interests.
    • Consider whether the list of actions to be undertaken by the relevant party should be exhaustive or non-exhaustive. If an exhaustive list of actions is used, then the relevant party may attempt to argue that upon undertaking the listed actions, it has satisfied its obligation to use best or reasonable endeavours.
    • If it is intended that there be two standards of conduct (for example, 'best endeavours' and 'reasonable endeavours'), then consider including definitions of what constitutes each of those standards, and how they differ.
  • Consider defining what a party is not required to do to comply with its obligations: Again, to avoid ambiguity as to whether a party has fulfilled its obligations, consider including specific examples of what that party is not required to do. In particular:
    • Consider whether the party is required to spend money or not, in undertaking best or reasonable endeavours. If a party is required to spend money, consider whether there should be a maximum limit beyond which it is not required to spend money. Similarly, consider whether the party should be required to forego an opportunity to make profit, in complying with its obligation to use best or reasonable endeavours.
    • Consider whether or not the party is required to undertake other actions in using best or reasonable endeavours, such as disposal of assets, instituting or settling legal proceedings, or instituting or settling industrial action.
  • Consider whether the assistance of another person should be required: If the assistance of another person (for example, the other party to the contract) is required for a party to be able to use best or reasonable endeavours, then spell out the relevant actions to be undertaken (and don't simply rely on the Mackay v Dick duty to co-operate).
  • Set out any relevant timeframes: If appropriate, set out any timeframes during which a party is required to use best or reasonable endeavours. This may be relevant where there is likely to be a change in circumstances throughout the term of the contract, especially where any such change in circumstances will affect a party's ability to use best or reasonable endeavours. 
  • Exercise caution in using 'hybrid' terms: There is an abundance of case law in Australia concerning 'best endeavours' and 'reasonable endeavours'. On the other hand, there is significantly less Australian case law regarding other terms, such as 'commercially reasonable endeavours' and 'reasonable best efforts', despite these terms being commonly used outside of Australia. It is much more difficult to anticipate how such 'hybrid' terms will be interpreted in Australia, and therefore it is important to exercise caution in using any such terms.

Interestingly, the case of KS Energy Services Ltd v BR Energy (M) Sdn Bhd [2014] SGCA 16 included an observation to the effect that the use of the phrase 'reasonable endeavours' would necessarily impose a less onerous obligation than if the phrase 'all reasonable endeavours' had been used. That observation included a comment that the use of the phrase 'reasonable endeavours' might only require a party to take one course of action and not all possible courses of action.

1Einstein J in Aiton Australia Pty Ltd v Transfield Pty Ltd [1999] NSWSC 996 considered that it was not open to the Court to imply a term that the parties would jointly share the costs of the mediator. As such, the dispute resolution clause (a mediation clause, in that case) was held to be uncertain and therefore unenforceable (despite Einstein J's conclusion that the remainder of the clause was sufficiently certain to be enforced). This was cited by Vickery J in WTE Co-Generation v RCR Energy Pty Ltd [2013] VSC 314.

 

Topics:  Arbitration, Breach of Contract, Carve Out Provisions, Contract Drafting, Dispute Resolution

Published In: Alternative Dispute Resolution (ADR) Updates, General Business Updates

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

© DLA Piper | Attorney Advertising

Don't miss a thing! Build a custom news brief:

Read fresh new writing on compliance, cybersecurity, Dodd-Frank, whistleblowers, social media, hiring & firing, patent reform, the NLRB, Obamacare, the SEC…

…or whatever matters the most to you. Follow authors, firms, and topics on JD Supra.

Create your news brief now - it's free and easy »