Scottish court confirms adjudication is a mandatory step under option W2

‘Although a Scottish case, this judgment is likely to be followed by the English courts  and therefore has important ramifications.’

The ethos of NEC is to instil good project management between the contracting parties. The contracts seek to have clarity in the contractual relationship and clear processes by which changes in scope, price and time are assessed during the life of a project and how disputes are managed.

Coupled with that ethos, cases on NEC contracts are rare, meaning there is little judicial guidance on matters of interpretation. However, the January 2021 decision by the Scottish Court of Session in Fraserburgh Harbour Commissioners v. McLaughlin and Harvey Ltd confirmed the steps NEC users must take in a dispute when option W2 applies. Specifically it confirmed that the parties must adjudicate before a dispute is referred to a tribunal.

Clause W2

The decision related to option W2 in an NEC3 Engineering and Construction Contract (ECC), which is the dispute resolution procedure when the UK Housing Grants, Construction and Regeneration Act 1996 applies. Clause W2 has been amended in NEC4 ECC by the addition of a new provision for referral of disputes to senior representatives if the parties agree, but in regard to adjudication it remains the same.

ECC clause W2.2 (W2.1 in NEC3) provides that: ‘A dispute arising under or in connection with this contract is referred to and decided by the Adjudicator. A Party may refer a dispute to the Adjudicator at any time’.

ECC clause W2.4 states that, ‘(1) 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. (2) If, after the Adjudicator makes a decision, a Party is dissatisfied, that Party may notify the other Party of the matter which is disputed and state that it intends to refer the disputed matter to the tribunal. The dispute may not be referred to the tribunal unless this notification is given within four weeks of being informed of the Adjudicator’s decision. (3) The tribunal settles the dispute referred to it.’

The contractual requirement to notify the referral of a dispute to a tribunal within four weeks again emphasises the collaborative nature of NEC contracts, including the aim to deal with issues that may arise in a proactive way and typically during the life of a project. The applicable W2 clauses are also in the NEC4 Professional Service Contract (PSC), NEC4 Design Build and Operate Contract (DBO) and NEC4 Term Service Contract (TSC), plus their relevant sub-contacts.

Dispute and judgment

Fraserburgh Harbour Commissioners appointed McLaughlin and Harvey in November 2012 to deepen the north part of the harbour under an NEC3 ECC. Following completion of the works, the client alleged a number of defects. It argued that the works had not been carried out in accordance with the contract and claimed damages in excess of £7 million. It chose not to refer the matter to adjudication but instead instigated court proceedings in October 2020.

The contractor contended that it was mandatory under clause W2 of the contract to take the matter to adjudication prior to referring the dispute to a court or tribunal. The client contended that the jurisdiction of the court was not removed by the contractual dispute resolution procedures. Rather, the action for damages was a means of preventing the claim being time-barred due to length of time it had taken to investigate the extent of the claim. Judge Sarah Wolffe found in favour of contractor and dismissed the action. She held that adjudication was a mandatory first step that must be taken before bringing any further proceedings in the courts or by way of arbitration.

The court rejected the client’s argument that the action should be formally paused to allow adjudication and if necessary, arbitration, to take place. It accepted the possibility that in the event the action for damages was dismissed, the client claim could be time barred. However, it did not agree that this was a good reason for the court to entertain the action for damages.

Implications for NEC users

Although a Scottish case, this judgment is likely to be followed by the English courts and therefore has important ramifications. It appears the courts will give effect to the widely used dispute resolution provisions in NEC contracts. Further, the decision is consistent with a number of recent decisions in the English courts, which have given effect to the express words of a contract agreed by the parties.

The case highlights that NEC contracting parties which have adopted clause W2, and then fail to adjudicate prior to instigating court or arbitral proceedings, risk falling foul of the contractual provisions and incurring needless litigation costs. This is even if the parties have attempted to resolve the dispute by meetings between senior representatives (as provided in NEC4 contracts) as following this process does not avoid the need to adjudicate before proceedings are issued.

It also raises important considerations for those involved in multi-party disputes. Clients that have separate NEC contracts with a contractor and consultant where W2 applies will need to consider carefully their strategy for bringing claims which involve both suppliers. Adjudication can only be between two parties, and so adjudications will need to be commenced at the same time and the timetable managed.

This is to avoid any issue should formal proceedings be needed, which will need to be commenced within four weeks of a decision. Equally, a party facing a claim they wish to pass down to a sub-contractor or consultant for an indemnity or contribution will need to ensure that the adjudication process is completed under that contract before bringing the third party into a formal claim before a tribunal.

Key Points

• Parties under an NEC contract where option W2 applies must adjudicate before starting proceedings before a tribunal.
• Adjudication will be needed even if the parties have tried and failed to resolve issues using senior representatives.
• Courts will give effect to the express words of a contract agreed by the parties.