Truss Issues: interpreting dispute resolution clauses in building contracts
The New South Wales Supreme Court of Appeal has affirmed long standing contract interpretation principles when construing a dispute resolution clause.
Lipman Pty Ltd v Empire Facades Pty Ltd (formerly known as Empire Glass and Aluminium Pty Ltd)  NSWCA 217 (Lipman & Empire) involved a dispute between a construction company, Lipman Pty Ltd (Lipman) and an aluminium supplier, Empire Facades Pty Ltd (Empire), who it engaged to design, construct and supply associated works for the refurbishment of the lobby of a premises located in Sydney (the Contract).
Clause 42 of the Contract provided for a dispute resolution mechanism.
Clause 42 – expert determination to be final and binding?
Clause 42.1 provided that, if a dispute arises between the parties, either party may commence the dispute resolution process by providing notice to the other party identifying and providing details of the dispute. The dispute is then referred to nominated senior executives of each party who are to undertake genuine and good faith negotiations. Clause 42.3 further provided that, in the event that the parties fail to resolve the dispute through these negotiations, the dispute is to be referred for “expert determination”.
Clause 42.11 provided that an “expert determination” in relation to the dispute will be, inter alia, final and binding on the parties (unless either party gives a “notice of appeal” to the other party within 15 business days of the determination). Further, Part P of the General Conditions annexed to the Contract included a form of expert agreement (to be entered into with an expert if a dispute is referred to same), the terms of which provided at clause 7 that the expert determination will be “final and binding“.
However, clause 41.12 further provided that if the expert determination did not resolve the dispute, either party was entitled to commence proceedings in relation to the dispute.
The dispute and expert determination
A dispute arose between Empire and Lipman in relation to the performance, and subsequent termination, of the Contract. Notices were issued by the parties in accordance with clause 42.1, with the dispute referred to negotiation, and then subsequently for expert determination. On 4 October 2016, the expert entered into an agreement with the parties in the form of Part P (which clause 7 is referred above) to the General Conditions annexed to the Contract (the Expert Agreement). The expert made two determinations pursuant to the Agreement and ultimately found in favour of Lipman in the amount of $106,943.63.
On 19 December 2016, Empire issued a notice of appeal in accordance with clause 42.11 and, on the same day, commenced proceedings against Lipman in the Supreme Court of New South Wales (the First Proceedings) seeking to re-agitate the issues considered by the expert.
By Notice of Motion filed 30 January 2017, Lipman sought a permanent stay or dismissal of the First Proceedings on the grounds that the dispute had already been resolved by the expert in accordance with the Contract and that, pursuant to the terms of the Contract, it was not open for Empire to re-agitate the expert’s findings.
In dispute was the construction and interpretation of clause 42 and, in the circumstances, if Empire was permitted by the Contract to commence the First Proceedings.
Lipman argued that:
- clause 42.12 of the Contract does not permit a party to commence litigation unless the determination by the expert did not resolve the dispute; and
- the only circumstances where an expert can be taken to have not resolved the dispute are circumstances where the expert makes a determination which is not in accordance with the Contract or Expert Agreement, or the expert has not carried out the task they were required to undertake pursuant to the Contract or Expert Agreement.
In response, Empire argued that:
- clause 42.12 is not required by a party to invoke a common law right to challenge an expert determination (and therefore clause 42.12 was not intended for this purpose); and
- the reference in clause 42.11 to an appeal procedure is not limited to proceedings for a declaration of nullity of the expert determination (and therefore does allow for, inter alia, an appeal of the expert’s determination).
The Court found in favour of Empire and said that the construction of clause 42, as argued by Lipman, would result in an unreasonable and unnatural reading of the clause because it would be both inconsistent with the language contained within the clause, and would substantially constrain the right of appeal which the parties have expressly agreed to. The Court said at  that the argument advanced by Lipman “[did] not sit easily with the words of the Contract and [did] not really provide for a right of appeal at all”.
Lipman sought leave to appeal the Court’s decision.
The Court of Appeal of the Supreme Court of New South Wales unanimously dismissed Lipman’s appeal on the grounds that Lipman had failed to establish any error in the primary judge’s construction of clause 42 of the Contract.
The Court of Appeal applied the principles of interpretation as set down in A Hudson [i] with respect to the meaning of a “determination of the expert“. A Hudson provides that a “determination of the expert” means a determination by an expert in accordance with the terms of the contract (i.e. if an expert makes a determination not in accordance with the contract, it is not a determination at all) and therefore, if the parties intended for this to have any other meaning, it would be unreasonable and unnatural.
Further, the Court of Appeal distinguished the facts of the present case with Lipman Pty Ltd v Emergency Services Superannuation Board  NSWCA 163 where the contract in issue did not have a similar “litigation” sub-clause and the Court found the expert determination to be final and binding. The Court said that, when comparing the clauses of the contracts in both cases, it is clear that the parties in the present case intended for there to be a right of appeal.
Lipman & Empire reiterates that a Court will construe dispute resolution clauses by strict application of established contract interpretation principles. Artificial interpretations are unlikely to succeed. Parties should take care and seek professional advice when drafting and interpreting dispute resolution clauses.
The case also serves as a reminder to legal practitioners to closely examine the established case-law and legal principles in respect of the interpretation and construction of dispute resolution clauses prior to drafting or commencing action in relation to such clauses.
For more information, please contact ERA Legal.
[i] Legal & General Life of Australia Ltd v A Hudson Pty Ltd (1985) 1 NSLWR 314
- Trust your limitations: Time limits for bringing proceedings for breach of fiduciary obligations
- Lest we offset – When are statutory demands inappropriate?
- Reinstating a discharged PPSR security interest: Can it be done?
- Statutory demands - revisiting a genuine dispute
- ERA Legal helps a favoured return
- Quistclose, but no cigar: preference claims and transactions made for a specific purpose
- PPSA Financial Property: the sub-classifications explained
- A foreign regime - winding up overseas companies
- Wiping the slate clean: Claims against a discharged bankrupt
- Beware! Informal negotiations can create binding agreements