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Prefer arbitration over litigation? Make sure your agreement contains a clear arbitration clause

AGL Energy Ltd v Jemena Gas Networks (NSW) Ltd [2017] NSWSC 765 (Hammerschlag J)

Arbitration is often the preferred means of dispute resolution because it can produce a binding award in a quick, confidential and cost effective manner. However, as illustrated by a recent decision of the Supreme Court of New South Wales, parties to commercial contracts need to make it clear in their contract that arbitration is the preferred course, or risk being drawn into litigation against their will.

The Dispute – quick facts
The plaintiff, AGL Energy Ltd, is a gas retailer and the defendant, Jemena Gas Networks Ltd, operates a gas distribution network in NSW. Under a Reference Service Agreement (Agreement), Jemena provides AGL with details of gas meter readings so that AGL can bill its retail customers. AGL alleged that Jemena breached its meter reading obligations and that as a result, AGL could not properly bill its clients and suffered loss.

In accordance with their Agreement, AGL gave Jemena written notice of the dispute and requested a meeting to attempt to resolve the dispute in good faith. However, the dispute was not resolved and Jemena subsequently wrote to AGL advising that the matter should be referred to mediation. Five months later, Jemena again wrote to AGL, this time giving notice that the matter had been referred to arbitration and that a suitable arbitrator should be identified.

Instead, AGL commenced legal proceedings in the NSW Supreme Court. Jemena applied to the Court for an order referring the dispute to arbitration, on the basis that the Agreement contained an arbitration agreement which compelled the dispute to be arbitrated in the circumstances.

Dispute Resolution under the Agreement
The Agreement between AGL and Jemena contained a clause entitled "Dispute Resolution". It stated, amongst other things, that “…each Party expressly agrees to endeavour to settle the Dispute by mediation… before having recourse to arbitration or litigation.”

Jemena argued that this amounted to a binding arbitration agreement. It argued that because the clause reads arbitration or litigation, the parties could elect which process applied. As Jemena elected to arbitrate before AGL’s decision to litigate, Jemena claimed that its election should prevail.

No Arbitration Agreement
Justice Hammerschlag found that there were "significant shortcomings" in the arguments put forward by Jemena - and that there was no binding arbitration agreement between the parties.

His Honour reiterated that for the Agreement to amount to an arbitration agreement (within the meaning section 7(1) of the Commercial Arbitration Act 2010 (NSW)), it must make binding provision for compulsory arbitration. In this Agreement, the parties had expressly agreed to a Dispute Resolution process, including mediation. However, based on the wording of the relevant clause, neither party could have reasonably thought that it was committing itself to compulsory arbitration.

His Honour found that there was "no justification in language or logic" to read the clause in the Agreement as creating a contractual right to force a party to arbitration over litigation. The Agreement did not provide any clear indication that arbitration had primacy as the preferred method of dispute resolution; nor did it suggest that one party could elect and compel the other to participate in arbitration.

As a result, Jemena's application for a referral to arbitration was dismissed. The dispute will now be agitated in open Court.

Implications
This case serves as an important reminder that dispute resolution clauses within commercial contracts must be explicit and clearly worded.

If arbitration is the preferred method of dispute resolution, any agreement between the parties must contain an express arbitration clause. The clause may be composed in a form that gives parties the opportunity to elect between methods of redress when a dispute arises. It might also require that arbitration be the first option in certain circumstances only, or following certain events.

Either way, the intentions and preferences of the parties must be adequately captured at the time of agreement. If not, there may be no opportunity to arbitrate before litigation is commenced.

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.

Thanks

We thank the authors of this legal update Karen Ingram and Bonnie Perris from Clayton Utz Litigation and Dispute Resolution team for their contribution to Pulse.

Tags: Arbitration, Legal practice, Dispute handling administration