Navigating split dispute resolution clauses – where's Google Maps when you need it?

In brief 6 min read

A recent Supreme Court of Victoria decision sounds a warning to principals and contractors alike – your dispute resolution clause must be clear and unambiguous, because the court will not go out of its way to cure a commercially peculiar, but perfectly workable, clause. That warning is particularly important where the parties agree upon a dispute resolution clause that contemplates different processes for different species of dispute.

Key takeaway

• Split dispute resolution clauses (with different processes for different species of dispute) are increasingly common. This case highlights the need for careful drafting to avoid costly disputes and to ensure dispute resolution mechanisms are appropriately adapted to disputes that might arise.

The facts

RWHP v Lendlease¹ arose in the context of a public-private partnership, and the parties agreed a dispute resolution clause that provided for expert determination in certain circumstances and arbitration in others:

If the Panel does not meet, resolve the Dispute… within the Resolution Period [five Business Days from a referral], the Dispute is hereby:

1. referred to expert determination… in the case of Disputes in relation to Compensation; or
2. referred to an arbitrator… in the case of all other Disputes.

(emphasis added)

In this case, the state engaged RWHP, the project company, to build and operate the Royal Women's Hospital, and contracted Lendlease under a design and construct contract. Lendlease, in turn, subcontracted works related to the water/hydraulic pipework system to Aquatherm Australia Pty Ltd.

With the end of the limitation period drawing near, RWHP notified Lendlease of an alleged defect in the pipework and referred the matter to a panel for resolution. When the panel failed to resolve the dispute, RWHP did two apparently contradictory things. First, it purported to refer the dispute to arbitration. Second, it filed an originating process with the Victorian Supreme Court, which it explained as 'a purely precautionary measure'² to guard against the risk that RWHP would be outside the limitation period in the event that the dispute was not properly referrable to arbitration.

RWHP sought an order that, under section 8(1) of the Commercial Arbitration Act 2011 (Vic), its dispute with Lendlease be referred to arbitration and a stay of the court proceedings. The question for the court was whether the dispute was the subject of an arbitration agreement or required expert determination.

The decision

RWHP's primary argument was premised on the proper construction of the contract and, alternatively, it relied on Lendlease's conduct to assert that the dispute ought to be resolved by arbitration. His Honour dismissed RWHP's arguments on both bases.

The contractual terms

The contract stipulated that any dispute about 'Compensation' was to be referred to expert determination. All other disputes were referable to arbitration. 'Compensation' was defined broadly and included 'Loss or damage suffered by a party', which included '… any liability… of any kind'.

RWHP argued that the drafters could not have intended that the arbitration agreement be given so little work to do, and that, instead, 'Compensation' should be read down, so that only disputes concerning the amount of loss were referable to expert determination.

His Honour did not accept RWHP's position. In concluding that Lendlease's construction led to a 'commercially sensible result', he noted the cost efficiencies of expert determination, and remarked on the parties' ability to challenge in court an expert's determination regarding claims above $250,000.³

His Honour's decision confirms that the courts will construe the ordinary meaning of the contract in the context of the contract as a whole and the parties' commercial purpose. Where there is no ambiguity in the language, and where the parties' commercial purpose is not undermined, it is not enough to show that the outcome might be commercially peculiar or atypical.

Lendlease's conduct

Between 14 March 2018, when RWHP purported to refer the dispute to arbitration, and 4 April 2018, Lendlease exchanged letters with RWHP about an appropriate arbitrator, and even sought an extension of time for appointment. Lendlease, by its conduct, operated on the understanding that the dispute would be resolved by arbitration.

RWHP relied on this conduct to ground three arguments: that it could be inferred from the parties' correspondence they agreed the dispute should be resolved by arbitration; that Lendlease waived its right to rely on the expert determination provision; or that Lendlease elected arbitration over expert determination. His Honour dismissed each in turn.

Central to his Honour's decision in Lendlease's favour was that: both parties appeared to be under a mistaken apprehension that arbitration was appropriate; and the words 'is hereby' (underlined above) meant that the dispute was automatically referred to expert determination – it was unnecessary for either party to take an additional step.

His Honour's reasoning raises two important issues:

• 'No oral modification' clauses are enforceable. While his Honour confirmed that a 'no oral modification' clause will not prevent an oral contract, it provided Lendlease some protection from RWHP's inferred agreement argument.⁴
• Submission to an arbitrator's jurisdiction is treated differently from submission to a court's jurisdiction. The former is a purely contractual question: 'has there been a legal agreement to arbitrate'. Even where a party files points of claim or defence, they might not be taken to have agreed to an arbitrator's jurisdiction. That is not the case in litigation, where, typically, engaging with the substance of a dispute before a court will be taken as a submission to its jurisdiction.⁵

What does this mean?

It is increasingly common for parties to use high-value and highly complex construction agreements to agree a split dispute resolution clause, including expert determination as the preferred mechanism for a majority of disputes. That course makes sense in an industry as litigious as construction, because expert determination is (for good reason) seen as both time and cost efficient.

RWHP v Lendlease, however, highlights a number of things to bear in mind at the negotiation stage.

Expert determination can lack the procedural rigour of arbitration or litigation, which can compromise its ability to reach the 'correct' answer. That is particularly concerning regarding high-value or highly complex disputes. Expert determination is well suited for smaller, discrete claims: eg disputes about the quantum of liquidated damages, or whether a contractor has satisfied a particular technical criteria.

A salve to that concern is to draft, as the parties did here, a right of appeal regarding an expert's decision, either to litigation or arbitration. Here, the parties included that right for disputes over $250,000. The risk with that work-around is the duplication of cost: having already spent a not-insignificant sum on expert determination, at one or another party's insistence the dispute may be heard again, afresh, by an arbitrator or judge.

Alternatively, the parties might hive off smaller, discrete claims for expert determination. The risk with this approach – again, as we saw here –  is that the drafting must be precise or the parties may find themselves embroiled in a costly dispute about who has jurisdiction: the judge, the expert or the arbitrator.

The key message then is that expert determination is an appropriate and efficient answer for the right problem; but getting the contractual machinery to operate just right requires nuanced and precise drafting.