The Importance of Dispute Resolution Clauses for Businesses

Woolworths and Lowe’s have fallen out over the amount Woolworths must pay for Lowe’s stake in the Masters joint venture. Lowe’s has commenced an action in the Federal Court as Woolworths’ plans to sell off Masters to recoup some of its losses over the past seven years. Below, we set out latest developments in the dispute as well as the importance of dispute resolution clauses in commercial contracts.

Background to the Dispute

Lowe’s is an American ‘big box’ retailer in the hardware space, akin to Walmart. In 2009, Lowe’s and Woolworths established a joint venture vehicle, Hydrox Holdings, to run the joint venture and create Masters. Over seven years, both Woolworths and Lowe’s sunk billions into the venture, buying sites and establishing Masters stores across Australia. Last year, faced with year on year losses, Woolworths and Lowe’s decided to pull the plug.

Why is There a Dispute?

In January, Lowe’s exercised its put option to sell its share of Hydrox Holdings to Woolworths, to try and recoup what little it could from its $1.3 billion investment in Australian hardware. The Hydrox Holdings venture was worth around $3.3 billion in total. Woolworths owns 66% of Hydrox Holdings, and Lowe’s owns the remainder. Lowe’s legal action threatens to derail Woolworths $1.5 billion exit plan, as the largest part of Woolworths’ plan to sell off Masters and other hardware entities is subject to Lowe’s’ approval.

Since January, the pair has not been able to come to an agreement on what Woolworths should pay for Lowe’s’ share, despite having three independent experts assess the value of Lowe’s’ stake. After Woolworths wrote down the business of Hydrox Holdings by more than $2 billion in February, Woolworths valued the put option at nil. 

Lowe’s alleges that Woolworths excluded it from the management of Hydrox Holdings from the beginning and that Woolworths engaged in oppressive conduct. While the Federal Court will wait to determine these claims, Woolworth’s exit plans are on hold.

Managing a Dispute

All these sorry developments provide a great opportunity to discuss the importance of dispute resolution clauses to preserving good working relationships. Whenever two parties enter into an agreement with one another, be it for a joint venture, for the supply of goods or the provision of services, it’s important to draft a contract which clearly outlines how parties will manage a dispute.

Dispute Resolution Clauses – Why Have Them?

Including dispute resolution clauses in a contract is essential for preserving business relationships.

• No need to waste time deciding what to do: In a dispute, communication has likely broken down, and tempers have flared. Having clear, step by step instructions on what to do if a dispute arises means that the parties don’t need to waste time arguing over whether a meeting should be held, whether mediation should occur or whether the matter should go straight to court.
• Chance of repairing the business relationship: If a contract clearly sets out what to do in a dispute, parties can focus on resolving their issues. This may mean that there is a greater chance of repairing the relationship and getting back to work, rather than the relationship dissolving completely.
• Chance of resolution before litigation: Going to court should never be the first option. Litigating is incredibly expensive and months or even years can pass before parties reach a resolution. Should parties then waste their efforts on litigation, or on getting back to business? Dispute resolution clauses can require parties first go to mediation to resolve their dispute. Most matters settle before court, saving parties time and unnecessary expense.

What Should a Dispute Resolution Clause Include?

Any well-drafted dispute resolution clause should firstly set out what constitutes a dispute. For a shareholders agreement, this may be when a particular resolution fails to pass three times in a row at either a directors meeting or a shareholders meeting.

Secondly, the clause should set out how the complainant notifies the other party. It’s surprising, but the other party may not be aware that they have done something to fracture the business relationship with the other party. The clause should set out that the complainant needs to tell the other party their complaint in writing and set out what the complainant would like to happen to remedy the situation.

Thirdly, the clause should set out that the parties need to meet in good faith to attempt to settle the dispute. The parties must agree to meet within two weeks of the complainant sending the notice. 

If the parties refuse to meet or can’t agree to resolve the dispute at the meeting, either party may refer the matter to a mediator. If the parties can’t agree on who the mediator should be, either party may ask the Law Society of the relevant state to appoint a mediator. The parties must attend any mediation arranged by the mediator.

Key Takeaways

• Lowe’s and Woolworths have spent eight months arguing over the valuation of Lowe’s’ stake in Hydrox Holdings, the joint venture vehicle established to run Masters Home Hardware and other hardware ventures.
• Masters was not profitable and so in 2015, Woolworths decided not to continue with the venture. Lowe’s has now commenced court action, alleging that Woolworths oppressed Lowe’s and did not allow Lowe’s management oversight in the joint venture.
• Dispute resolution clauses, if included, have not prevented Lowe’s from going to court. However, they may have aided in the early stages of the dispute. Dispute resolution clauses set out clear steps to help resolve a dispute, hopefully ensuring that parties do not need to spend time and money going to court.

If you need assistance drafting your dispute resolution clause, or resolving your matter, get in touch with LegalVision’s dispute resolution lawyers on 1300 544 755 or fill out the form on this page.