So, let’s play a little word association game – what do you come up with if we give you “Mad Max” and “alternative dispute resolution”?
There are, of course, a few different possibilities. You might be thinking of the crowd in Mad Max: Beyond Thunderdome chanting, “Bust a deal, face the wheel” (which is one way of dealing with contractual breaches). You might just be thinking “Hey, I like my dispute resolution alternative, but not quite THAT alternative”. Or you might be thinking about a recent case in the NSW Court of Appeal concerning a claim by the producer and director of “Mad Max: Fury Road” against Warner Brothers. As this third possibility contains more useful lessons about contractual interpretation (and arbitration clauses) then the other two possibilities, it is the third possibility which we will discuss below.
The dispute arose because the companies which employed George Miller (who directed “Mad Max: Fury Road”) and Doug Mitchell (who produced the the film) wanted more money from Warner Brothers, for whom the film was made. The companies claimed that the film was delivered under budget, which would have entitled the companies to a $US7 million bonus; Warner Brothers disagreed. The companies also argued that when Warner Brothers brought in a co-financier of the movie (an entity called Ratpac), the opportunity to co-finance should have been offered to the companies first, which had not occurred.
So, the companies went off to the Supreme Court if New South Wales, but Warner Brothers sought to stop the show by arguing that any disputes about the contract for the production of the movie had to be resolved by arbitration in Los Angeles County (most filmmakers would prefer to go to LA to collect Academy Awards, but it seems that you can go there to collect arbitral awards, also) What was described as “the Letter Agreement” between the companies and Warner Brothers did not contain an arbitration clause, but the Letter Agreement did include the following clause which was referred to as “Clause 21”:
Balance of Terms:
The balance of terms will be WB and WB standard for “A” list directors and producers, subject to good faith negotiations within WB’s and WB’s customary parameters.
Warner Brothers said that the LA arbitration clause was part of its “standard for A-list producers and directors” and was, accordingly, incorporated into the contract. As a result, Warner Brothers brought an application in the Supreme Court of New South Wales seeking to have the court proceedings stayed, so that the dispute could be resolved in Los Angeles in accordance with the arbitration clause.
That raised two questions for consideration. The first question was whether Clause 21 operated to incorporate the additional “standard” terms (including the arbitration clause) into the Letter Agreement, or whether addition terms could only be incorporated following a further step involving “good faith negotiations”. The trial judge held, and the Court of Appeal agreed, that further negotiations were not a precondition to the incorporation of the additional terms. Instead, although Clause 21 imposed an obligation on both parties to negotiate in relation to the amendment of the standard terms, if those negotiations did not result in any amendment, the unamended Warner Brothers standard terms were to apply.
Round 1 to Warner Brothers. That left the second question, which was whether the standard terms which were incorporated in the Letter Agreement included the arbitration clause. The trial judge held that the arbitration clause was not included, because the question of what the standard terms were was a matter for evidence, and the evidence on which Warner Brothers relied did not establish that the arbitration clause was incorporated in contracts with a sufficient degree of “regularity” to establish that the arbitration term was “standard”.
The Court of Appeal disagreed, and held that the arbitration clause was a standard term included in the Letter Agreement. The Court of Appeal fund that the evidence established that the arbitration clause was “habitually proffered” by companies in the Warner Brothers group. The consequence was that the arbitration clause did form part of the Letter Agreement, and the Court of Appeal is now considering what orders should be made (although you would have to think that there is a pretty good chance that the Supreme Court proceedings will be stayed and the parties will be require to arbitrate in Los Angeles County).
So what are the lessons when negotiating (and litigating) on commercial contracts? The first lesson is that if additional terms which are not part of an agreement are incorporated by reference (by a clause having a similar effect to Clause 21) each party should make certain that they understand what is being incorporated. Additional terms can be incorporated from a number of different sources – often in the form of standard printed terms, but also from legislation or by references to a party’s “usual trading terms”. The present dispute required two expensive court cases to determine what had been incorporated into the Letter Agreement, so unless you want to Max out your legal bill, special attention should be paid to any contractual provision which incorporates terms from anywhere other than the document you are trying to agree on.
The second lesson is to also give special attention to dispute resolution clauses, because if the parties have agreed to use some process other than going to court, Australian courts will start from the position that such an agreement should be adhered to. Sometimes, having your day in court is just what you need; at other times, there’s a better ((cheaper/faster/more confidential) way. Either way, it is much better to get the dispute resolution clause right from the outset, rather than having to fight about them once an actual dispute which needs resolving has come to life.
So, although it’s a long road which has no turning, the Fury Road might have been a lot shorter if the parties had more carefully considered their contractual position at the outset. Back in the days of Mad Max: Beyond Thunderdome, disputes could be resolved by the maxim “Two men enter, one man leaves”, but these days, (the NSW Court of Appeal bearing of course, no resemblance to the Thunderdome), the better description might be “Two parties enter, one party appeals”.
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