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Know your limits: Narrowly drafted multi-tiered dispute resolution clause precludes party from referring claim for unliquidated damages to arbitration

Inghams Enterprises Pty Limited v Hannigan [2020] NSWCA 82

The decision of the NSW Supreme Court in Inghams Enterprises Pty Limited v Francis Gregory Hannigan [2019] NSWSC 1186, previously reported in Pulse, has been overturned on appeal. The case considered the operation of a multi-tiered dispute resolution clause (DR clause) which provided for disputes under a chicken growing agreement to be progressed through a series of steps (or tiers); each one directed at resolving a dispute at the earliest opportunity. The Court at first instance concluded that a disputed claim for damages fell within the terms of the DR clause and was required to be arbitrated.

In Inghams Enterprises Pty Limited v Hannigan [2020] NSWCA 82 the NSW Court of Appeal determined that, while all disputes relating to a contract were the subject of the parties' multi-tiered DR clause, only a subset of those possible disputes were required to be referred to arbitration because of the narrower scope of the arbitration clause.

Remind me about the facts

Inghams entered into a chicken growing contract (Agreement) with Mr Hannigan (a chicken grower), whereby Mr Hannigan would grow chickens, supplied to him by Inghams, in exchange for a fee. In 2017, Inghams purported to terminate the Agreement and stopped supplying chicks. Mr Hannigan obtained a declaration from the NSW Supreme Court that the termination was wrongful, and that the contract remained on foot. Following this determination, Mr Hannigan made a claim for unliquidated damages for loss of profits during the period of non-supply of chicks. Inghams rejected the claim.

Mr Hannigan issued a notice of dispute under the Agreement's DR Clause, which provided for the mediation of all disputes. However, if mediation did not achieve a resolution, the DR Clause provided that disputes that 'concern any monetary amount payable and/or owed by either party to the other under this Agreement' were to be referred to arbitration. When mediation of the claim failed, Mr Hannigan sought to refer the dispute to arbitration. Inghams commenced proceedings in the NSW Supreme Court to restrain the referral on the basis that the arbitration clause did not apply to the disputed claim, because Mr Hannigan's claim for damages was not a claim for an amount 'payable and/or owed under this Agreement'.

Did the arbitration clause apply?

As noted above, at first instance, the Court held that the italicised words extracted above were not limiting and the arbitration clause did apply to the dispute. Slattery J reached that view by observing the language of the DR Clause as a whole and the arbitration clause in particular, and commenting that the alternative outcome would introduce "a degree of arbitrariness to the operation of the clause [which did] not seem consonant with the predictable operation of a clause designed to provide rapid certainty in a commercial contract".

The majority in the Court of Appeal disagreed. Meagher JA and Gleeson JA concluded that the claim for unliquidated damages did not fall within the scope of the arbitration clause. The majority construed the arbitration clause narrowly, excluding the claim for unliquidated damages from its scope because it did not relate to an amount 'payable' or 'owed' under the Agreement. Damages for loss of profits did not constitute 'a monetary amount payable under the contract', as the claim was based upon Inghams' breach of contract, and the requirement to pay damages for a contractual breach arose by operation of law, rather than under the Agreement in the present case. Accordingly, it was held that the dispute was not required to be referred to arbitration.

In a dissenting judgment, Bell P took a view that aligned with Slattery J. His Honour considered that a liberal approach should be applied to the construction of the dispute resolution clause, based upon both the legal principles applicable to dispute resolution clauses and a number of textual indications in the DR Clause which suggested that the parties intended for the clause to be construed broadly.

Implications

The decision illustrates that dispute resolution clauses, especially multi-tiered ones, should not be considered boilerplate, as the devil is in the detail. Such clauses provide fertile ground for litigation, as reflected by the survey of interpretation approaches in various cases contained in an appendix to the judgment.

The terms of multi-tiered dispute resolution clauses must be considered carefully before entering into a contract, to ensure that there is a clear understanding of how disputes are dealt with. Sometimes that might not be uniform. In particular, if an objective is to arbitrate all disputes arising in relation to, or connected with, a contract, and avoid fragmentation of processes, the scope of an arbitration clause must be broad enough in its terms to encompass that.[i]


[i] [Note: The above material provides a summary only of the subject matter covered, without an assumption of a duty of care by Resolution Institute or Clayton Utz. The material is not intended to be nor should it be relied upon as a substitute for legal or other professional advice. Copyright in the material is owned by Clayton Utz.]