The recent decision of the Supreme Court of New South Wales in Sweetpea Petroleum Pty Ltd v Paltar Petroleum Limited [2018] NSWSC 1649 considered whether the Court ought to exercise its inherent power to dismiss or stay proceedings in circumstances where it is alleged that proceedings were commenced in breach of a dispute resolution clause.

The proceedings concerned a Joint Venture and Operating Agreement (the JVOA) between Sweetpea Petroleum and Paltar Petroleum relating to the exploration for gas in the Northern Territory.

Relevantly, clause 23 of the JVOA contained a tiered dispute resolution process, which the parties were required to comply with prior to commencing court or other proceedings. In broad terms, it provided that the parties must engage in good faith negotiation and, failing that, expert determination in accordance with clause 24 of the JVOA. Further, the parties agreed that any decision of the expert was “conclusive and binding on the Participants in the absence of manifest error”.

A dispute arose between the parties in respect of the payment of expenses and other amounts under the JVOA. In accordance with the terms of the JVOA, Paltar Petroleum served two ‘Called Sum Notices’ on Sweetpea Petroleum claiming sums of $90,367.81 and $69,735,604, respectively.

Sweetpea Petroleum commenced proceedings in the Supreme Court in which it sought various declarations concerning the validity of notices issued under the JVOA and injunctions restraining Paltar Petroleum from taking any action based on those notices. In response, Paltar Petroleum sought an order under r 13.4(1) of the Uniform Civil Procedure Rules 2005 (NSW) that the Court dismiss the proceedings as “frivolous and vexatious”, as Sweetpea Petroleum had failed to comply with the dispute resolution processes in the JVOA prior to commencing the proceedings (namely, it had failed to proceed to expert determination following the good faith negotiations).

Ball J held that before commencing proceedings, it was necessary for a party to exercise its rights under the dispute resolution mechanism.

However, Ball J refused to grant a stay of the proceedings because, in his Honour’s view, the disputes in question were not suitable for resolution by an expert. Specifically, Ball J held that:

•   The disputes in question concerned the interpretation of the JVOA and the correct characterisation of payments under the JVOA, and were issues peculiarly appropriate for the Court to decide.
•   The disputes in question did not require the specialist knowledge of an expert.
•   The disputes raised a number of issues, including whether Palter Petroleum had acted in good faith in serving certain contractual notices. These matters may require factual investigation through discovery and the issue of subpoenas. The expert determination process did not provide a suitable mechanism by which those factual investigations could occur.
•   Paltar Petroleum did not point to any prejudice it had suffered as a consequence of the conduct of Sweetpea Petroleum. The fact that Sweetpea Petroleum had embarked on the dispute resolution process contemplated by the JVOA by referring the dispute to a meeting of the parties’ respective Chief Executive Officers could not prevent it from seeking recourse through some other dispute resolution mechanism.

The use of tiered dispute resolution provisions is commonplace in construction contracts. This decision demonstrates that, where a contract provides for expert determination as the final and conclusive step, the Court’s power to stay or dismiss the proceedings is discretionary (which can be contrasted with the position if there is a valid arbitration agreement between the parties). Further, courts may be unwilling to exercise such discretion if the dispute is considered unsuitable for resolution by an expert (or more suitable for resolution by a court).

The full decision can be found here.