Interpreting arbitration agreements: Is your clause concerning?

What you need to know

• Tailored dispute resolution clauses can provide a streamlined and cost effective process for the resolution of disputes, but they can also generate litigation of their own.
• The New South Wales Court of Appeal has reinforced that dispute resolution clauses are to be interpreted objectively in accordance with ordinary principles of construction.
• Applying these principles, the majority held that a claim for unliquidated damages for breach of contract did not concern a "monetary amount payable and/or owed…under this Agreement".
• The split decision in this case highlights that even though the principles of construction are clear, application of these principles does not always lead to an obvious result.

What you need to do

• When considering whether to use a split or tiered dispute resolution clause, you should carefully consider whether the benefits of the tailored processes outweigh the risk that the dispute resolution clause itself will become the subject of dispute.
• Dispute resolution clauses should always receive careful attention in the drafting phase, as they will come under intense scrutiny when a dispute arises. 

Dispute resolution clauses are one of the most heavily scrutinised clauses in any contract, in no small part because they are only examined by parties that are already in dispute.  Recognition of this has led a trend away from treating dispute resolution procedures as 'midnight clauses', which are inserted in the early hours of the day on which the contract is signed. 

Instead, parties often include carefully considered provisions to provide what is hoped will be a streamlined and cost effective process for the resolution of any disputes that might arise.  There can, however, be a temptation to negotiate highly bespoke and tailored dispute resolution processes, which are tiered such that multiple procedures apply differently to each category of dispute.  Application of these dispute resolution provisions to disputes that actually arise is not always straightforward.

In our update late last year, we highlighted a decision regarding a split dispute resolution clause that provided for expert determination of certain disputes under a building contract.  The Court of Appeal's decision in Inghams Enterprises Pty Ltd v Hannigan [2020] NSWCA 82 provides yet another example of parties forced to litigate the proper meaning of their agreed dispute resolution procedure.  

The facts

Inghams and Hannigan were party to a growers agreement (Agreement), under which Inghams would supply batches of chicks for Hannigan to raise and return to Inghams once they were fully grown. 

In 2017, Inghams purported to terminate the Agreement. Hannigan took the matter to court and was successful in his claim for wrongful termination.  Hannigan did not pursue damages at this time, and the Agreement resumed as normal.

Later, in 2019, Hannigan issued a notice of dispute seeking unliquidated damages for the loss incurred during the period in which the Agreement had wrongfully been terminated. 

Clause 23 of the Agreement contained a multi-tiered dispute resolution procedure, which provided for informal and formal dispute resolution of all disputes "arising out of [the] Agreement". This procedure comprised: 

(a) a 30 day "Initial Period" in which the parties were obliged to use best efforts to resolve the dispute (clause 23.3);

(b) mediation (clause 23.4); and

(c) where mediation was unsuccessful, arbitration for any disputes that "concern any monetary amount payable and/or owed by either Party to the other under this Agreement, including without limitation matters relating to determination, adjustment or renegotiation of [fees due under particular provisions of the contract]" (clause 23.6.1).

When the parties failed to resolve the dispute at mediation, Hannigan referred the matter to arbitration.  Inghams then initiated proceedings to restrain the referral to arbitration on the basis that:

(a) the dispute did not fall within the ambit of clause 23.6.1; or, in the alternative

(b) Hannigan had waived his right to insist on compliance with clause 23 as a result of the 2017 proceedings. 

At first instance, the court found in Hannigan's favour and determined that the claim fell within a broad construction of clause 23.6.1.

The decision

By 2:1 majority, the Court of Appeal reversed the decision of the primary judge and held that a claim for unliquidated damages did not fall within the scope of clause 23.6.1.

Meagher JA, with whom Gleeson JA concurred, first considered whether such a claim would fall within the scope of clause 23.1, which required that the dispute must "arise out of [the] Agreement".  The court determined that, when construed broadly according to the objective theory of contract, clause 23.1 covered any dispute relating to the Agreement, including a claim for unliquidated damages.  

Meagher JA then turned to the construction of clause 23.6.1, and determined that the phrase "monetary amount payable and/or owed" should be construed broadly in consideration of the various meanings of payable and owed.  Similarly, the court adopted a broad construction of the use of the term "concerns", finding that it should be interpreted to include disputes about, affecting, or involving such a monetary amount. 

Despite this broad approach to construction, the majority found that the dispute did not concern a monetary amount payable under the Agreement because:

(a) the words “a monetary amount payable and/or owed” referred to an obligation owed by one party to the other to pay a monetary amount;

(b) the phrase "under this Agreement" identified the contract as the source of the payment obligation; and 

(c) whilst compensatory damages may be quantified by reference to performance under the contract, the actual source of the obligation to pay such damages is not contained within the contract but is an obligation arising by operation of law.

As a result, the Court of Appeal made a declaration that the dispute was not subject to the arbitration agreement in clause 23.6.1.

Bell P's dissent

The dissenting judgment of Bell P provides some important insights in relation to dispute resolution provisions.  His Honour noted that "[d]ispute resolution clauses are just as capable of generating litigation as any other contractual clause, and the law reports are replete with cases concerned with the construction of such clauses".  Bell P helpfully assembled a sample of such cases in an Appendix to his Honour's judgment providing numerous examples of seemingly innocuous dispute and jurisdiction clauses that have led to appellate court litigation.

Bell P also discussed at length the authorities in support of adopting a broad and liberal construction of dispute resolution clauses and endorsed the following statement made by the Full Federal Court in Hancock Prospecting that the proper contemporary approach for construction of dispute resolution clauses is to:

" …give expression to the rational assumption of reasonable people by giving liberal width and flexibility where possible to elastic and general words of the contractual submission to arbitration, unless the words in their context should be read more narrowly. One aspect of this is not to approach relational prepositions with fine shades of difference in the legal character of issues, or by ingenuity in legal argument (Gleeson CJ in Francis Travel at 165); another is not to choose or be constrained by narrow metaphor when giving meaning to words of relationship, such as ‘under’ or ‘arising out of’ or ‘arising from’…"

The Full Federal Court's decision in Hancock Prospecting was upheld on appeal to the High Court.  Our update examining the High Court's comments on the approach to interpretation of arbitration agreements is accessible here. 

Ultimately, this led Bell P to agree with the majority on the proper interpretation of "arise out of this Agreement" in clause 23.1, but to reach a different conclusion to the majority on the meaning of the phrase "under this Agreement".  In that regard, Bell P held that compensatory damages are a form of money payable "under" contract by virtue of the fact that the quantum of such damages is calculated by reference to notional performance of the contract.  

Implications

The parties in Inghams Enterprises appear to have taken substantial care in crafting a bespoke dispute resolution process to suit the nature of their agreement. Providing that only a subset of disputes would be referred to arbitration, however, introduced uncertainty in the application of the dispute resolution process.  That uncertainty ultimately led to protracted litigation about the appropriate dispute resolution process, expending time, and resources that could otherwise have been devoted to resolving the substance of the dispute.

While this case reaffirms the principles applicable to interpreting dispute resolution clauses in Australia, it demonstrates that their application can sometimes produce surprising results.  Accordingly, parties should think very carefully about whether it is really necessary and appropriate to have a split or tiered dispute resolution process.  This is particularly the case given there is always the option for parties to agree a bespoke dispute resolution process after the dispute arises when the parameters of the dispute are known.

Where there is to be no split or tiered processes, the dispute resolution clause should be drafted as broadly as possible to operate as a 'catch-all' for all disputes.

If, notwithstanding the risk that the dispute clause will one day be litigated, the parties consider there is benefit in agreeing split processes upfront, particular care needs to be taken in formulating the clause.  In these cases it is even more important that the dispute resolution process is not a 'midnight clause', hastily cobbled together in the hours before execution, but is the subject of careful consideration by experts who understand the extensive caselaw in this area.