When you just HAVE to adjudicate

This article is from December’s edition of Aggregate, which featured a month-by-month review of 2021. This is January’s entry. To read the complete newsletter as a PDF, click here.

We start off our review of the year with a look at adjudication…what else? But to make things a bit more interesting, we head north of the border to the Scottish courts. And consider a case involving an NEC contract – which is relatively rare both there and in the English courts.

The Outer House of the Court of Session (roughly Scotland’s equivalent to the High Court) was tasked with considering the dispute resolution provisions of the NEC3 Engineering and Construction Contract in The Fraserburgh Harbour Commissioners v. McLaughlin & Harvey Limited. Those familiar with the NEC3 ECC will know that various options are selected when putting the contract together, including which dispute clauses are applicable. For works carried out where the Housing Grants, Construction and Regeneration Act 1996 applies, the usual option clause is W2.

The contract was for works carried out at Fraserburgh Harbour, a harbour near Aberdeen that offers services to the fishing, oil and renewables sectors. The harbour was being deepened to allow increasing vessel sizes to dock and to allow a greater efficiency in the port. Unfortunately, when the works were completed the Harbour identified what it said were defects in the works. It commenced an action seeking damages totalling more than £7million.

However, the contractor, McLaughlin & Harvey, objected to this action. It referred to clause W2.4(1) – a standard part of option W2 – which provides that “A Party does not refer any dispute under or in connection with this contract to the tribunal unless it has first been decided by the Adjudicator in accordance with this contract“. It said that the failure to refer the dispute to adjudication before commencing the proceedings meant the action should not be allowed to continue. It also argued that the ‘tribunal’ in the contract was arbitration not litigation, and so the court had no jurisdiction anyway.

The Harbour admitted that it had not adjudicated the dispute, but argued, perhaps somewhat optimistically, that there was an implied right to litigate the merits of a dispute through the court regardless of clause W2.4. But the court was having none of it. It said that such an argument was inconsistent with the clear words of the contract, which should be upheld so long as not inconsistent with the Construction Act (which they were not). It said that in effect, clause W2.4 set out a sequence for the different modes of dispute resolution, of which adjudication was the first step – a condition precedent to resort to the tribunal (however defined). And so it struck the claim out.

This was perhaps an unsurprising decision – but it is fairly rare to get decisions on these types of issues, so some judicial clarity is welcome. The court was clear that the parties had signed up to a tiered dispute resolution mechanism – adjudication first – and that they should therefore be held to it. All users of the NEC3 (and NEC4) ECC will be similarly bound unless W2 has been amended, and so they should be careful to make sure they comply with the need to adjudicate first too (or seek an agreement that adjudication can be dispensed with if there are good reasons not to adjudicate).

As a footnote, the case came back before the Inner House of the Court of Session (an appeal court) in October 2021. That time round the court said that the lower decision was wrong to ‘strike out’ the claim altogether, and said that it should only have been (in effect) stayed pending the outcome of the adjudication. That is potentially an important procedural point for issues such as limitation, but it doesn’t affect the underlying decision: W2.4 is an important part of the NEC dispute resolution framework, and parties must respect it by adjudicating first.