Dispute resolution clauses: When the road to a binding determination is paved with non-binding options

The recent case of Contract Control Services v Department of Education and Training [2017] VSC 507 provides further clarification on what constitutes a ‘method of resolving disputes’ for the purpose of satisfying the requirement in section 10A of the Building and Construction Industry Security of Payment Act 2002 (Act). The case makes it clear that it is possible to mandate a process of dispute resolution that includes non-binding steps, so long as it culminates in a binding determination.

Contract Control Services (CCS) entered into a construction contract with the Department of Education and Training (DET) in 2013 for construction works and related goods and services for the construction of the Bendigo Senior Secondary College Theatre Project.

CCS issued a final payment claim in the sum of $2,682,200.75 for which DET issued a payment schedule of nil. CCS applied for adjudication with Adjudicate Today for a revised amount of $2,462,063.26, made up of 118 variations. Most of these variations were categorised as ‘second class variations’ under section 10A of the Act. Because the variations were greater than 10% of the contract price, they would not be claimable under the Act if the contract contained a method for resolving disputes.

Legislative recap

Under section 10A(3)(d) of the Act, second class variations are not claimable if the contract price is more than $5,000,000 (unless it does not contain a method for resolving disputes).

However, section 10A(4) has an important impact on this provision, because if the variations claimed under the contract total more than 10% of the contract price, the threshold of $5,000,000 is reduced and second class variations will not be claimable if the contract price is greater than $150,000 (unless the contract does not contain a method for resolving disputes).

Therefore, variations will not be considered ‘second class variations’ and usually will not be claimable under the Act if:

1              the variations are more than 10% of the contract price;

2              the contract price is more than $150,000; and

3              the contract contains a method for resolving disputes.

The concept of ‘a method of resolving disputes’ is therefore significant in deciding whether or not parties will be able to rely on the security of payments regime.

CCS appealed the adjudicator’s decision to the Supreme Court, arguing that the contract did not contain a valid method for resolving disputes. In this case, the adjudicator found that the contract did contain a valid method of resolving disputes, so the variations were not claimable and CCS was only entitled to $61,750.47.

Branlin v Totaro [2014] VSC 492 sets out the test for ‘a method of resolving disputes’ and requires the contract to provide:

1. a process which could be described as a ‘method’ of dispute resolution
2. a process which is capable of resulting in a binding resolution of the dispute and
3. a process which the contract makes it a binding obligation for the parties to enter upon and participate in.

This test was affirmed in SSC Plenty Road v Construction Engineering (Aust) & Anor [2015] VSC 492.

The CCS and DET contract set out the following process for dispute resolution in relation to a second class variation:

1. Where a contractor has issued a notice of dispute in relation to a payment claim, and the principal (at its election) has responded, and the Superintendent has provided its written decision in respect of the contract’s notice of dispute;
2. if either party is dissatisfied with the Superintendent’s decision, the parties are required within 14 days to confer at least once to attempt to resolve the dispute, and if unsuccessful, may explore other methods of dispute resolution;
3. in the event that the dispute cannot be resolved, either party may refer the dispute to arbitration or litigation.

CCS argued that this did not provide a binding obligation to participate in arbitration or litigation because the clause allowed the parties to elect to proceed to mediation or other non-binding methods of dispute resolution. It also focused on the word ‘may’ as giving the parties an option to proceed to arbitration, rather than creating a binding requirement.

The court made clear that if the method of resolving disputes is confined to a method that may not result in resolution, such as mediation, the contract will not satisfy the test.

However, the court disagreed with CCS and found that while it was open to the parties to try non-binding methods of dispute resolution as steps in the prescribed method; if those steps were unsuccessful the parties would ultimately be required to arbitrate or to litigate. The court held that in the circumstances, there was a clear process which was required to be followed by the parties, which culminated in an election between arbitration or litigation, both of which would result in a binding determination. The word ‘may’ merely indicated a choice between two binding methods and was not fatal to the binding nature of the dispute resolution method.

The court, therefore, held that all three limbs of the Branlin test were satisfied. Unfortunately for CCS, this meant that the adjudicator had correctly determined that none of its second class variations were claimable under the Act.

Key take-away

This case provides welcome additional clarity on the validity of dispute resolution clauses in the context of the security of payments regime. It is clear from Branlin and SSC Plenty that for the contract to contain a valid method for resolving disputes, the parties must be bound to follow the method, and the result must be binding on the parties. This case shows us that the test does not prevent a contract from setting out a process that includes various options for dispute resolution, including the option of exploring alternative non-binding methods, as long as the process culminates in a mandatory binding determination.