The 3 Cs of Strong ADR Clauses: Keeping Disputes from Bubbling Over

Gurmehar Kaur

By Gurmehar Kaur

All too often, dispute resolution clauses are treated as an afterthought—‘boilerplate’ or ‘standard’ language lifted from another contract and inserted into the dealings with little debate or scrutiny [1]. But like a hastily popped bottle of champagne, a poorly drafted dispute resolution clause can leave parties with a legal mess—spilling over into uncertainty, delay, and costly litigation over the very process meant to avoid court in the first place.

‘Champagne clauses’, or ‘midnight clauses’ refer to Alternate Dispute Resolution (‘ADR’) provisions in contracts, which are all too often addressed at the very end of contract negotiations – hastily inserted at the eleventh hour with little regard for their legal and procedural implications [2].

This issue has become even more pronounced with the rise of ‘tiered’ or ‘stepped’ champagne clauses in contracts, which outline a structured sequence of escalating dispute resolution steps [3], such as negotiation, mediation, and expert determination before resolving to arbitration or litigation [4].

While these escalation clauses are intended to promote early resolution and reduce costs, they have also made the champagne clause dilemma more complex. Each additional ADR provision introduces more opportunities for uncertainty, procedural disputes, and enforceability challenges, often leaving parties in conflict over the scope, interpretation, and procedural requirements of the dispute resolution process itself [5]. Ironically, this undermines the very purpose of ADR in the first place—efficiency, cost-effectiveness, and the preservation of commercial relationships.

ADR Clauses Under Scrutiny: Australian Case Law

An effective dispute resolution clause is underpinned by 3 key considerations: certainty, compliance, and commerciality [6]. These factors ensure that ADR mechanisms are enforceable, practical, and aligned with the commercial expectations of each party in a dispute.

I Certainty: Clarity is Key

The decision in WTE Co-Generation & Anor v RCR Energy Pty Ltd & Anor [7] highlights the importance of certainty in dispute resolution clauses. In this case, Clause 42.2 (dispute resolution clause) of the Contract required that the ‘senior executive representing each of the parties must meet to attempt to resolve the dispute or agree on methods of doing so’ [8].

However, the Victorian Supreme Court found that this clause was uncertain and thus unenforceable. Vickery J emphasised the ambiguity of the clause stemming from the word ‘or’ which left it unclear whether the parties were required to meet and attempt to resolve the dispute, or agree on methods of doing so [9]. Simply put, the clause was an agreement to agree on the dispute resolution process as opposed actually providing a process to determine which of the two options should be pursued and how the dispute should be resolved.

II         Compliance and Enforceability: Courts Expect Adherence

The Supreme Court of Queensland’s decision in Santos Limited v Fluor Australia Pty Ltd [10] reinforces the judiciary’s expectation that parties adhere to contractual ADR mechanisms before resorting to litigation. In this case, Douglas J granted Fluor’s application to stay the proceedings, affirming that courts will enforce contractual ADR mechanisms unless compliance is ‘obviously futile’ or ‘so slight as not to justify enforcing the agreement’ [11]. The Court held that Clause 60, which was a multi-tiered dispute resolution clause, was undoubtedly enforceable.

Correspondence between the parties was deemed insufficient to substitute for the contractually stipulated good-faith negotiations or ‘other form of dispute resolution’ required under clause 60.5 before the parties could commence litigation. The Court emphasised that Santos’s desire for speed and expediency in resolving the dispute through litigation did not justify ‘sidestepping’ the requirements of clause 60 [12]. Fundamentally, the starting position for the judiciary is that ‘the parties should be held to their bargain to resolve their dispute in the agreed manner’[13] unless the party wishing to abandon the contractual ADR mechanism ‘can show good reason for that course’[14].

III        Commerciality: Avoiding Unintended Pitfalls

ADR clauses must be drafted with precision to avoid unintended outcomes and potentially uncommercial outcomes. In Lipman Pty Ltd v Empire Facades Pty Ltd[15], the New South Wales Court of Appeal unanimously upheld the Supreme Court’s (Ball J) decision, rejecting Lipman’s appeal for a permanent stay or dismissal of Empire’s court proceedings.

The Court affirmed that Clause 42 (dispute resolution clause) of the Contract permitted litigation once an appeal was lodged within the stipulated 15-business-day period, without requiring a finding that the expert determination was invalid or nullified[16]. The Court emphasised that there was ‘nothing unbusinesslike’[17] in giving effect to the dispute resolution mechanism that the parties had expressly chosen and agreed to, evidenced by Clause 42.2 requiring disputes to be ‘referred’ to expert determination rather than being conclusively ‘resolved’ by it.

Effective Champagne Clauses

A strong, well-drafted champagne clause is the cork that keeps disputes from bubbling over to litigation.

As Donna Ross aptly notes, ‘good drafting makes for good contracts and good business relationships’ [18]. It is therefore essential that ADR clauses are carefully structured, clearly articulated, and legally sound to ensure they serve their intended function—facilitating swift and effective dispute resolution rather than becoming a source of contention in their own right.

 The ADC provides proven sample ADR clauses, but tailoring them with expert legal guidance ensures they align with the unique needs of each party and each contract.

[1] Henning Mediation & Arbitration, CLE Seminar: Drafting Effective ADR Clauses (Web Page, 18 February 2025) https://www.henningmediation.com/n/PGJ/cle_seminar.pdf.

[2] Ibid.

[3] Ashurst, Quickguide: Tiered Dispute Resolution Clauses (Web Page, 18 February 2025) https://www.ashurst.com/en/insights/quickguide-tiered-dispute-resolution-clauses/.

[4] Norton Rose Fulbright, Escalation Clauses: Enforcing Dispute Resolution Steps Before Litigation or Arbitration (Web Page, 18 February 2025) https://www.nortonrosefulbright.com/en/knowledge/publications/b3e0c031/escalation-clauses.

[5] Saudi Centre for Commercial Arbitration, Guide to Drafting ADR Clauses (Report, 2016) https://www.lexismiddleeast.com/regulatory/SaudiArabia/SaudiCentreCommercialArbitration_Guide_to_Drafting_ADR_Clauses.

[6] Ibid (n 1).

[7]  [2013] VSC 314.

[8] Ibid (n 7) [12].

[9] Erin Lewis, Laura Neil and Darren White, ‘WTE Co-Generation v RCR Energy’ (2013) 32(2) The Arbitrator & Mediator 135, 137.

[10] [2016] QSC 129.

[11] Ibid [28].

[12] Ibid (n 10) [27].

[13] Zeke Services Pty Ltd v Traffic Technologies Ltd [2005] 2 Qd R 563.

[14] Savcor Pty Ltd v New South Wales [2001] NSWSC 596 [42] (Barrett J).

[15] [2017] NSWCA 217.

[16] Ibid [26].

[17] Ibid (n 15) [28].

[18] Donna Ross, ‘Beware the Champagne Clause: When the Effervescence Fades. It May Just Be Pathological”, Australian Disputes Centre, Article https://disputescentre.com.au/beware-the-champagne-clause/.