Where there’s an intention, there’s a way – When can ambiguous dispute resolution clauses turn from vague to void?
Posted on April 28, 2021
Tesseract International Pty Ltd v Pascale Construction Pty Ltd [2021] SASCA 8
In the recent decision of Tesseract International Pty Ltd v Pascale Construction Pty Ltd [2021] SASCA 8, the Court of Appeal opted to do away with a strict approach to issues of ambiguity in the interpretation of contracts. Instead, the Court has moved towards a more modern approach, which places commerciality and the intention of the parties as the paramount concern in contract clause interpretation.
The decision highlights the Courts’ inclination to construe the terms of an obscure clause in a contract to give effect to the intention of the parties, even in circumstances where that intent is capable of multiple meanings.
In keeping with this liberal approach, the Court of Appeal upheld the trial judge’s decision to find that a multi-tiered dispute resolution clause would not be declared void for ambiguity merely on the basis that there existed more than one interpretation.
Background
Tesseract International Pty Ltd (the Appellant) entered into a contract with Pascale Construction Pty Ltd (the Respondent) for the provision of design and engineering services related to the construction of a Bunnings Warehouse at Windsor Gardens. The contract was a standard form Master Builders Association contract[1] for the engagement of consultants.
The working relationship between the parties broke down after it was alleged by the Respondent that the Applicant’s engineering designs for the Bunnings site were defective. The Respondent alleged that it had suffered loss and damage and, in an attempt to resolve the dispute, reverted to alternative dispute resolution clauses 21 and 22 under the contract. The clauses in question created a multi-tiered mechanism which required the parties to first participate in conciliation and, failing that, arbitration. Both processes were expressed to be binding on the parties.
The Appellant argued that it was not possible for either party to engage in the dispute resolution process under those clauses, given they were ambiguous and could be construed in more than one way. Specifically, the Appellant argued that:
- conciliation as a process is inherently non-determinative and non-binding, contrary to the contractual provisions; and
- it is not possible for both the conciliation and arbitration processes to be determinative and binding.
Proceedings were issued by the Appellant in the Supreme Court of South Australia in December 2019 seeking a declaration affirming its position. The Master of the Court who heard argument did not agree with that argument and held that conciliation was "relatively broad and elastic", and there was no reason it could not be binding. The Master held that the use of the label "conciliation" in this instance did not create uncertainty.
The Appeal
The decision was appealed by the Appellant on the solitary ground that the lower Court should have held that the dispute resolution clauses were void for ambiguity. The Appellant made the argument that the contract did not clearly set out how the processes of conciliation and arbitration were interlinked, creating friction as both were said to be determinative and binding. It was argued that to interpret the conciliation process as binding would “impermissibly distort the notion of a binding process, and to give it a meaning that is contrary to its accepted legal meaning”.
The Court of Appeal, per Doyle JA, held that reference to the conciliation process in the context of a process that is binding did not give rise to uncertainty. The reason for this is that, rather than focusing on the labels of the dispute resolution processes used by the parties, the substance of what they had agreed to would become paramount to construe the clauses. Using this approach, it was clear that the contract in question provided for a two-step dispute resolution clause requiring conciliation and arbitration as a consecutive process.
The Appellant also raised the issue that having a two-step alternative dispute resolution process where both steps are intended to be binding would render the (first step) conciliation meaningless. Doyle JA held that there was no difficulty with this approach if the clauses were construed to mean that the conciliation was to be binding subject to arbitration, thus removing any uncertainty. Put another way, if one party did not agree with the outcome of conciliation, it could refer the matter to a binding arbitration. Conversely, if both parties accepted the conciliation outcome, that outcome would become binding.
In effect, the Court of Appeal held that dispute resolution clauses may not always will be void merely because they can be interpreted more than one way. The appeal was dismissed by Doyle JA (Kelly P and Livesey JA agreeing).
Points to take away
- Contractual provisions will not be declared void on the basis that they are “uncertain” merely because they can be interpreted in multiple ways.
- A contractual provision will only be declared uncertain and void where "the language used was so obscure and so incapable of any definite or precise meaning that the court is unable to attribute to the parties any particular contractual intention."
- The intention of the parties will be the ultimate guide to determining how a clause should be implemented in the event it can be implemented in multiple ways.
[1] It should be noted that the standard form wording has now been changed such that the conciliation process is no longer said to be binding.
