Dispute Resolution

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;
• use reasonable endeavours to resolve the dispute through negotiation; or
• a hybrid of some or all of the above types of alternative dispute resolution.

Dispute resolution clauses should be as clear, unambigious 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 to compel compliance with the process provided for in the contract.

Enforcement of dispute resolution clauses by a court have alsoresulted in an award of damages for lost opportunity.

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.

Ultimately the test for mitigation is not whether there was a better way of doing things, but whether what the innocent party did in fact do was what a reasonable person would have done. An innocent party is not under any obligation to do anything other than 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.

The question of mitigation only arises following breach and where damage are being claimed.

Where a repudiation of a contractual obligation precedes the time for performance, the reasonableness of the termination or continued performance is not considered.

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.

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/s;
• 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.

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 their scope is clear, including whether they relates only to existing claims, or to all present and future claims relating to the same subject matter. It is often helpful to particularise any future claims or causes of action which are included, if these can be anticipated. 

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.

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

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

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.

Settlement deeds often also include the following common terms:

• a term or recital indicating that the settlement is without admission of liability;
• a term to the effect that the parties agree to the deed in full and final settlement of the dispute and related matters;
• 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.

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 relating to settlement from communications relating to other aspects of a matter or business dealings. 

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. Such documents are often marked “without prejudice, save as to costs”, although this is not always the case. 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. However, offers that might be used in court to argue about allocation and quantification of costs ought to expressly warn the other side (in the contents of the communication) that the offer will be presented to the court on the question of costs.

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 and should be marked that way.

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 or on other compromised terms.