This precedent has been authored by Dr. Morris Averill, Solicitor, Averill Media Legal Services and updated by Dr. Gordon Hughes, Principal, Davies Collison Cave Law.
It is advisable for many commercial contracts that a dispute resolution clause is included in order to avoid expensive and unnecessary litigation.
Effective dispute resolution clauses
An effective dispute resolution clause should:
• define the obligations of the parties in the event of a dispute (or certain kinds of dispute);
• set out a clear mechanism for its resolution; and
• operate as a bar to the parties issuing proceedings, if:
o they don't follow the process; or
o the outcome is not satisfactory to a party but the dispute is for a monetary amount or damages not more than a set amount.
Where the contract mandates dispute resolution by the parties themselves but fails to provide a clear mechanism that can lead to a finalisation of the dispute (such as where the parties are simply required to “agree upon” a course of action), the clause could be rendered void for uncertainty. (See May & Butcher Ltd v R  All ER Rep 679;  2 KB 17; (1934) 103 LJKB 556; 151 LT 246.)
Similarly, a dispute resolution clause could be invalid if it provides for arbitration but fails to authorise the arbitrator to impose terms that he or she considers reasonable, or if it does not impose an obligation on the parties to abide by the arbitrator's decision. (See Whitlock v Brew (1968) 118 CLR 445;  ALR 243; (1968) 42 ALJR 271; BC6800460.)
It has been held that where a dispute resolution clause provides that a specified person is to nominate an arbitrator if the parties are unable to agree on a disputed matter, both parties have a contractual duty to request the said person to nominate. (See Booker Industries Pty Ltd v Wilson Parking (Qld) Pty Ltd (1982) 149 CLR 600; 43 ALR 68; 56 ALJR 825; BC8200112.)
Good faith negotiations
Controversy has arisen in the past over whether a dispute resolution provision may be void for uncertainty where it simply requires the parties to negotiate “in good faith” towards a resolution of the dispute. Some superior courts, particularly in the UK, have refused to enforce such clauses because of uncertainty and the inherent contradiction in requiring parties to promote their own self-interest while recognising the interests of the other party (see Courtney & Fairbairn Ltd v Tolaini Brothers (Hotels) Ltd  1 All ER 716;  1 WLR 297). However, Australian courts have been more prepared to validate such clauses, holding that mandatory good faith negotiations contain sufficient content not to be uncertain. This view holds that (see Coal Cliff Collieries Pty Ltd v Sijehama Pty Ltd (1991) 24 NSWLR 1 and United Group Rail Services Ltd v Rail Corp (NSW) (2009) 74 NSWLR 618;  NSWCA 177; BC200905748):
• negotiating “in good faith” will be construed to mean that the parties must adopt an “honest and genuine” approach to settling the dispute while “giving fidelity to the existing bargain”;
• there is no necessary inconsistency between negotiating “in good faith” and acting in one's self-interest;
• negotiating “in good faith” does not require a party to advance the interests of the other party; and
• a dispute resolution clause requiring parties to negotiate “in good faith” is not to be held void for uncertainty where their obligations have been defined (for example, by specifying which parties and/or their representatives are to undertake certain acts within defined time limits, failing which arbitration or some other clearly defined step is to take place).
Structuring progress of a dispute by a pre-agreed process may help the parties preserve a relationship more valuable than the disputed matter. Dispute resolution clauses often chain escalating responses to unresolved issues and guide the parties to move from direct informal discussion, through formal written exchanges, to mediation and then to arbitration or court.
Important factors to take into account with dispute resolution clauses include the following:
• How is the dispute resolution provision in the contract to be invoked? What kind of dispute is required before either or both of the parties may seek to enforce the clause?
• Are there any third or outside parties who may need to be involved in the dispute resolution process? Will the process affect other and related contracts?
• Dispute resolution clauses that provide for independent expert determination should confine the ambit of the determination to the resolution of specified matters (such as technical issues, valuations, rent reviews, quantifications and the like).
• Boilerplate provisions of this kind should be careful not to oust the jurisdiction of the courts, but simply provide for the chosen dispute resolution process as a condition precedent to litigation.
• Should the parties be required to negotiate in good faith before calling on others to determine or arbitrate their dispute? Related materials See generally the Australian Encyclopaedia of Forms and Precedents title “Alternative dispute resolution”. This title includes a variety of dispute resolution clauses (including for arbitration and expert determination), including detailed commentary about their differences and usage.