Thursday, December 13, 2012

Long term contracts and dispute resolution clauses - Part I

Dispute resolution under long-running contracts with continuing obligations can often pose issues which do not commonly surface in other scenarios. Often when disputes arise under a long-running contract, it is in the interest of both parties to not terminate the ongoing relationship, but settle the dispute either by themselves or by using some form of ADR. Such a settlement may take the form of a side/supplemental agreement. The nexus between such a side/supplemental agreement and the primary contract can vary- it may either be a variation or amendment of the primary contract, or it may be a standalone agreement with some nexus with the main contract. If however, subsequent disputes arise between the parties in relation to the performance of this side/supplemental agreement, an interesting question is the extent to which the dispute resolution clauses of the primary contract can apply to such a dispute. If the dispute resolution clauses in the side/supplemental agreement and the primary contract are identical or substantially similar, this is an academic question. However, if they are inconsistent, and a party seeks to rely on the dispute resolution clause under the primary contract, there are two main ways of achieving this result:

• Arguing that the side/supplemental agreement is a variation of the primary contract, and forms part of it; and
• Arguing that the nexus between the two contracts is such that disputes in connection with the performance of the side/supplemental agreement are disputes falling within the scope of the dispute resolution clause in the primary contract.

Against this backdrop, it is interesting that the English High Court in Interserve Industrial Services v ZRE Katowice recently considered a third option- implying the dispute resolution clause from the primary contract into the side/supplemental agreement.

We have previously discussed the issue of implying terms into a contract- noting the decision in Attorney General v Belize which held that terms may be implied into a contract only when, viewed objectively, the parties intended something other than what the language of the contract indicates. Implication is not the process by which a Court may add terms to a contract merely because they are reasonable, or because they would improve the contract or remove defects. However, in concluding that the arbitration clause in a contract can be implied into a subsequent settlement agreement between the same parties, the High Court in Interserve appears to have come perilously close to engaging in the second-guessing exercise which A-G v Belize warned against.

Interserve v Katowice involved a dispute between the contractor and sub-contractor at a construction site, which was successfully resolved by a settlement agreement. Pursuant to this agreement, an agreed outstanding sum was to be paid by the contractor to the sub-contractor on the latter achieving certain milestones. These milestones were identified with reference to the continued performance of the primary sub-contract. Clause 8 of the settlement agreement provided- ‘This agreement is governed by and construed in accordance with the laws of England and Wales and the courts of England and Wales shall have exclusive jurisdiction in respect of any dispute arising under this agreement’.

Subsequently, there arose a fresh dispute between the parties as to the payment of the agreed outstanding sum, and the sub-contractor sought to enforce the settlement agreement in the English courts. The contractor relied on an arbitration clause in the sub-contract to seek a stay of the court proceedings. As outlined earlier, the contractor had two main grounds on which to base its argument. Surprisingly however, the Court discusses only the first of these, i.e. variation; along with the novel alternative argument that the arbitration clause could be implied into the settlement agreement.

After an extensive examination of industry practice, the Court observes that unless the side/supplemental agreement is entirely unconnected with the earlier agreement i.e. standalone, or unless it has settled all claims arising out of the earlier agreement such that no reference to the earlier agreement is required any longer, English courts have held such side/supplemental agreements to be variations of the earlier agreement and therefore subject to the same dispute resolution provisions as the earlier agreement. However, after examining the parties’ submissions on the nature of the sub-contract and settlement agreement in this case, the Court concludes-

… on its proper construction, in many respects the December agreement either does not in fact vary the terms of the subcontract, or – if it does – then it does not do so in any material respect. However, the determination of that issue does not provide an answer to the key issue in the application, which is whether or not the December agreement incorporated the dispute resolution provisions of the subcontract … the key issue in the application is whether, on its proper construction, there was an implied term of the December agreement that disputes under the December agreement would be subject to the same dispute resolution procedure as obtained in the subcontract.

Therefore, the settlement agreement here did not vary the sub-contract, and the sub-contract and the settlement agreement were two separate agreements. The only two ways in which the dispute resolution clause of the sub-contract could be applied to this dispute would be (i) if the dispute arose out of the sub-contract (which is not discussed); or (ii) if the dispute resolution clause could be implied into the settlement agreement, which the Court proceeds to discuss.

Part II will discuss the Court's reasoning on the implication point and the merits of this approach.

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