20 April 2020

Commercial Dispute Resolution Process

Coronavirus, lockdown and drought is the perfect storm for commercial disputes.

In most commercial contracts there are dispute resolution clauses which govern how parties are to try and resolve disputes.  A recent High Court case demonstrates the importance of following the dispute resolution process set out in contracts, rather than simply reverting straight to Court.

Taupo Car Club Inc v TMP Limited (2020) NZHC 495

Facts

Taupo Car Club Incorporated (“TCC”) run sports meetings at the Motorsport Park, Taupo (also known as the Bruce McLaren Motorsport Park).  Previously TCC leased the land from the Taupo Regional Council.  In about 2005, TMP Limited (“TMP”) took an assignment of the lease from TCC and under this agreement TMP agreed to develop the racing track (“the Agreement”).  TMP also agreed to pay an annual levy of $20,000 plus GST.  In exchange, TCC were allowed to use the racing track for a specified number of days “free of charge”.

In 2018 the parties modified the Agreement, deleting the annual levy but inserting that TMP can charge for a range of things (catering, pit garages, track cleaning and a participation levy to name a few).  The Agreement does not specify how any of these charges are calculated.

The Dispute

TCC refuse to pay an arbitrary $50 per car per day participation levy which TMP insist is payable.  TCC has cancelled events until this issue is resolved.

The Agreement contains a dispute resolution clause with the following multi-tier dispute resolution process:

• Initiating resolution (genuine effort to resolve the dispute);
• Negotiation;
• Alternative dispute resolution (but not arbitration at this stage);
• If all else fails, arbitration.

The parties are not strictly following the dispute resolution steps as TCC is filing a statement of claim in the High Court and asking the Court to declare the $50 per car per day levy unlawful.  TCC’s justification for applying directly to Court is that TMP has repudiated the Agreement by refusing to perform its part of the contract, and therefore the dispute resolution process does not apply.

TMP says that the parties are following the dispute resolution process (albeit loosely) and that its actions do not repudiate the Agreement.

The key issue is whether TMP has repudiated the arbitration clause of the Agreement?  If the clause is still operative, the Court must stay (halt) the statement of claim.

Discussion

The relevant law is clause 8 (1) of Schedule 1 to the Arbitration Act 1996.  It states that the Court can stay proceedings if a dispute is under an arbitration clause.  However, if the arbitration clause is null and void, inoperative, incapable of being performed or that there is no dispute between the parties with regards to the matters agreed to be referred, the Court will not halt the proceedings.

Arguments

TCC put forward two arguments to support its position that the Court proceeding should be allowed to continue:

• TMP repudiated the arbitration clause and TCC accepted it:
  • By filing the Court proceedings, TCC accepted the repudiation.  TCC tried to show this as TMP were not allowing them to hold events free of charge, cancelling events and not engaging with all correspondence from the solicitors for TCC.  Relying on the English case Downing v Al Tameer [2002] 2 All ER (Comm) 545, where parties had a dispute but one of them denied the contract, the Court found that there was clearly no intention to continue dealing with each other and the arbitration clause did not apply.  However, the Judge said that the position of TMP is quite different.  The Court decided that although TMP took a hard line on the participation levy, they did not reach the threshold of “persistent refusal to perform” necessary for repudiation. Neither did they completely refuse to perform the arbitration clause. Therefore, neither the main contract nor the arbitration clause were repudiated.
• The requirement for arbitration under the arbitration clause does not and has not arisen because the discussions, negotiation and alternative dispute resolution steps have not been done:
  • TCC argued that the requirement for arbitration under cl 5 does not and has not arisen in this case because the preceding steps in clauses 5.1, 5.2 and 5.3 have not been met. The Judge did not like this argument and rejected it. The Court noted the danger of these multi-tiered resolution clauses but said that TCC and TMP had taken steps “broadly in accordance with the substance (of the arbitration clause).”  The Court also noted that there was some fault on both sides for not following all the steps, but that that is not a basis to deny the effect of the arbitration clause.  The Court agreed with what the solicitor for TMP proposed, in that TMP and TCC having agreed on an arbitration evaluation clause, the Court should allow them to fulfil that intention.

Result

The Court stayed the proceedings and the parties will now need to arbitrate.

Word of Caution

The current uncertain economic times are generating commercial friction.  When disputes arise, for example performing commercial contracts, due invoices or property sales that cannot proceed, the first step should be to check the contract dispute resolution clause and try and resolve the dispute in a way that broadly follows this.  As outlined above, Courts may acknowledge that you have followed the dispute resolution clause and stay any proceeding.  It should be noted that at any time the parties can agree to vary the dispute resolution process.  On the other hand, going down a completely different path could lead to a resolution, but later it could be declared invalid.  As TCC found out, with multi-tiered dispute resolution clauses, it is important to check the clause and take the dispute resolution steps one at a time.

If you would like further information, please contact Daniel Shore on 07 958 7477.