Dispute resolution

Dispute resolution clauses

A dispute resolution clause states the mechanism by which disputes between parties to a contract will be resolved.  It usually requires the parties to participate in a non-litigious process before litigation is commenced or in lieu of litigation.  It may also modify the parties’ rights to litigate, for example, by altering limitation periods or imposing compulsory arbitration.

Types of dispute resolution clauses

A contract may include a dispute resolution clause requiring the parties to engage in:

  • a binding arbitration, which may be governed by the Federal or State statutes governing international and domestic arbitration respectively;
  • expert determination and neutral evaluation;
  • a meeting between the parties’ respective CEOs;
  • mediation and conciliation;
  • negotiation; or
  • a hybrid of some or all of the above types of alternative dispute resolution.

Dispute resolution clauses should be as clear and specific as possible, without being inflexible, to ensure that they are enforceable. Where a dispute resolution clause is unclear, there is always a risk that the implementation of the clause will itself create grounds for further dispute.

Consideration should also be given to the potential delay caused by any mandatory pre-litigation dispute resolution mechanism. A court may stay proceedings which are commenced before such a mandatory procedure has been undertaken.

The absence of a dispute resolution clause is not fatal to the resolution of a dispute without court proceedings. It is always open to the parties to agree on a dispute resolution mechanism when a contractual dispute has arisen.  A court can also order the parties to mediate a contractual dispute even if one party objects or even where no party wishes to mediate.

Mitigation

A failure by an innocent party to mitigate its loss following a breach of contract may reduce the amount of damages payable to that party. The law will not require a contract breaker to pay for loss that the innocent party could have avoided by taking reasonable steps.

The ‘reasonable steps’ which are required of an innocent party are generally not particularly onerous (unless the contract provides otherwise). The innocent party should do what it reasonably can to minimise the loss, while acting within the course of its business. It is not required to sacrifice or risk its property or rights in order to mitigate its loss.

For more information, see below or download Gilbert + Tobin’s Guide to Mitigation of Loss Following a Breach of Contract.

The test for mitigation

Ultimately the test for mitigation is not whether there was a better way of doing things but whether what the innocent party did do was reasonable.  An innocent party is not under any obligation to do anything that is not in the ordinary course of business.

What an innocent party is required to do to mitigate its loss will always be a question of fact to be considered in all the circumstances.  Examples of what may be required might include:

  • entering into a substitute contract for example to buy or sell goods;
  • attempting to re-sell or re-let property; or
  • giving a builder a reasonable opportunity to rectify any defects (but not where the owner has reasonably lost confidence in the willingness and ability of the builder to do the work).

If the innocent party spends money in taking steps to mitigate that cost can also be recovered as damages in court proceedings.

Settlement deeds

Where a dispute is resolved, it is advisable for parties to enter into a settlement deed even if proceedings have not been commenced.  However, it is important to note that an oral or informal agreement to settle a dispute may be enforceable even if the parties have not, or have not yet, entered into a settlement deed.

Settlement deeds are also known as deeds of release.

Parties to the deed

The settlement deed should be entered into by:

  • any party that will need to perform an obligation under the deed; and
  • all parties, to the extent possible, who are involved in or may have a claim.
Payment

Settlement deeds usually involve payment by one party to the other.  The deed should include the following details surrounding such payment:

  • the time for payment;
  • the method of payment;
  • whether the payment is to be by way of lump sum or instalments;
  • whether tax is to be deducted;
  • consequences of default, including payment of interest; and
  • any right to set-off.
Releases and indemnities

A settlement deed will usually include either a unilateral or mutual release of claims between the parties.  The release must be carefully drafted so that its scope is clear, including whether it relates only to existing claims, or to all present and future claims relating to the same subject matter.

A settlement deed may also include an indemnity clause where there is potential liability to a person that is not a party to the settlement deed.

Disposal of proceedings

If proceedings have been commenced, careful consideration should be given to the disposal of those proceedings.  Proceedings may be disposed by:

  • discontinuing the proceedings;
  • dismissing the proceedings; or
  • entering judgment by consent for one party or the other.

The discontinuance or dismissal of proceedings usually does not prevent the proceedings from being re-commenced at a later time. For this reason, settlement deeds which provide for proceedings to be disposed of in these ways usually include wide releases that bar any further proceedings in relation to the dispute.

Other common terms

Settlement deeds often also include the following common terms:

  • a term or recital indicating that the settlement is without admission of liability;
  • a confidentiality clause, meaning that the dispute and the settlement of it (including any settlement figure) may not be discussed with third parties;
  • a no disparagement clause, by which the parties agree not to make any statement which is likely to injure the reputation of another party or otherwise bring them into disrepute;
  • a covenant not to sue (if proceedings have not been commenced);
  • a warranty that both parties have obtained independent legal advice; and
  • a governing jurisdiction clause.
Without prejudice privilege

Under the Uniform Evidence Acts, documents and communications will be subject to ‘without prejudice privilege’ and will therefore not be admissible in proceedings if:

  • the communication was made between persons in dispute, or between one or more persons in dispute and a third party, in connection with an attempt to negotiate a settlement of the dispute; or
  • the document was prepared in connection with an attempt to negotiate a settlement of a dispute.

A similar without prejudice doctrine applies under the common law, although there may be some differences (e.g. it is arguable that the common law doctrine only applies to communications being relied upon as admissions whereas the “in connection with” requirement in the Evidence Acts may be wider.

The purpose of the privilege is to enable parties engaged in an attempt to compromise litigation to communicate each other freely and without risk of making admissions that might be used in the litigation.

There are some circumstances in which without prejudice privilege can be waived, however it cannot be waived by only one party.

How to assert without prejudice privilege

The protection afforded by without prejudice privilege will depend on the nature and contents of the document or communication. The mere assertion that a communication is ‘without prejudice’ does not make it so. However, in order to maximise the chance of obtaining without prejudice protection, it is wise to:

  • clearly mark documents and communications as being ‘without prejudice’ where it is appropriate to do so; and
  • separate communications about settlement from communications about other aspects of a matter.

Without prejudice communications can still be admitted into evidence in court proceedings in some narrow circumstances. The most common circumstance is on an argument as to who should pay the costs of the proceedings. A party that wins may, contrary to the usual rule, be required to pay the costs of the proceedings where it is shown to have unreasonably rejected a settlement offer.

In deciding whether a document or communication should be expressed to be ‘without prejudice’, the general question to ask is “am I attempting to negotiate and settle this dispute by compromising the relief I am entitled to and would seek at a trial?” If the answer is yes, the letter should be without prejudice.

Without prejudice privilege and letters of demand

Letters of demand should not be written on a without prejudice basis. The purpose of a letter of demand is to state the full amount of the claim (so far as it may be known at the date of the letter) rather than to compromise the claim. It may be necessary to prove that the letter of demand was sent. This can be difficult if the letter is written on a without prejudice basis as it cannot be admitted into evidence.

In practice, a letter of demand is often accompanied by a separate without prejudice letter. The letter of demand claims the whole sum asserted while the without prejudice letter offers to settle the claim for a lesser amount.

More information on dispute resolution

For more information on dispute resolution, contact:

floro-andrew-2011-bw

Andrew Floro
Partner
afloro@gtlaw.com.au
+61 2 9263 4436
+61 403 124 284
Sydney

oleary-tim-2011-bw

Tim O’Leary
Partner
toleary@gtlaw.com.au
+61 8 9413 8408
+61 437 281 876
Perth

lynch-crispian-2016-bw

Crispian Lynch
Partner
clynch@gtlaw.com.au
+61 2 9263 4420
+61 458 302 303
Sydney