Scottish users can go to court at any time but must still adjudicate

Key points

• Scottish courts confirm that NEC users are not barred from initiating court proceedings at any stage of a dispute.
• However, court proceedings will be stayed until completion of all NEC dispute resolution procedures, including adjudication and, if specified as the tribunal, arbitration.
• NEC users should consider adding explicit wording to contracts to ensure disputes cannot be referred to a court prior to completion of each step of the NEC dispute resolution process.

Two recent Scottish court cases have confirmed that NEC users in Scotland can start court proceedings before they start adjudication, even though they must finish the adjudication and other NEC dispute resolution mechanisms before the dispute can actually be heard in court. It remains to be seen whether the English courts will follow the Scottish courts’ lead.

Fraserburgh harbour case

In October 2021 the Scottish Court of Session’s Inner House (the appeal court) overturned the January 2021 decision by judge Sarah Wolffe in Fraserburgh Harbour Commissioners v. McLaughlin and Harvey Limited, reported in Issue 112 (Vernon, 2020). The appeal court found that when an NEC3 Engineering and Construction Contract (ECC) states the tribunal is to be arbitration, clause W2.4 did not stop the parties going to court before they started the contractual dispute resolution process.

However, the appeal court held it would not be able to consider the dispute prior to the NEC dispute resolution mechanisms being followed, and accordingly stayed the case pending adjudication, a notice of dissatisfaction and then arbitration. The decision went some way to providing clarity on the Scottish courts’ approach to interpretation of clause W2.4, reinforcing the position that where the tribunal stated in an NEC contract is arbitration, the parties must adjudicate and arbitrate first before the dispute can be heard in court.

Glasgow hospital case

In November 2021 the NEC3 ECC clause W2.4 dispute resolution mechanism was again examined in Greater Glasgow Health Board v. Multiplex Construction Europe and others, though in this case the parties had selected the tribunal as the Scottish courts rather than arbitration. The case related to a £73 million claim against main contactor Multiplex and its partners over alleged defects on the £842 million Queen Elizabeth University Hospital in Glasgow, which opened in 2015.

The Scottish Court of Session’s Outer House (the court of first instance) acknowledged that client Greater Glasgow Health Board had failed to comply with clause W2.4. There had been no prior adjudication proceedings and consequently no notice of dissatisfaction issued before service of the court proceedings. It was therefore argued by the defendants that the client was contractually barred from raising the action in court, so the action was incompetent and should therefore be dismissed rather than stayed pending compliance with clause W2.4.

While judge Colin Tyre agreed the action was contractually barred, he nonetheless declined to dismiss it, instead staying it for adjudication. He said there was no material distinction between the adjudication and tribunal provisions of W2 so this was the, ‘appropriate and usual course’. The decision raises a number of issues for NEC users.

Despite the operation of a contractual bar, the judge was of the view that the courts retained jurisdiction to hear disputes under an NEC contract. In forming this view he determined, perhaps surprisingly, that clause W2.4 was not a ‘condition precedent’. This seems to be because the contractual bar was a matter which could be waived by the other party and did no more than prevent the courts from entertaining the dispute so long as the bar remained unwaived and yet to be decided by an adjudicator.

The judge distinguished the obligation from a condition precedent, stating it was not a contractual term of such materiality that its non-fulfilment amounted to a discharge of the contract and liberation of the other party from its obligations. It will be interesting to see how subsequent courts treat this approach and whether the English courts will follow the Scottish courts’ lead.

The judge reiterated that in the absence of a waiver of the contractual bar, the provisions of clause W2.4 applied and the parties were bound to comply with the dispute resolution mechanism in it. In doing so he dismissed the client’s arguments that the complexity, size and value of the dispute, which could result in, ‘as many as 22 adjudications,’ meant that adjudication was an inappropriate forum.

In his view, if parties to a contract wished to exclude disputes, including those in which joint and several liability is asserted, they could have done so. It was foreseeable at the time of contracting that in a project of this scale disputes might arise, but the parties had not seen fit to make special provision for disputes of any particular complexity. The contract stated that, ‘any dispute,’ may be referred, ‘at any time,’ for adjudication. This analysis is clearly welcome and provides some certainty to parties contracting under clause W2.4 of NEC3 and NEC4 contracts.

Implications for NEC users

The two decisions mean NEC users cannot escape the requirement to adjudicate specified at clause W2.4. This is a pre-requisite to a court or arbitration engaging in the merits of a dispute. However, it is clear that irrespective of the tribunal specified, and notwithstanding that parties have expressly contracted not to, ‘refer any dispute under or in connection with the contract to the tribunal unless and until it has first been decided by the Adjudicator in accordance with the contract’, that the courts are likely to look for ways to sidestep that contractual bargain and maintain their right of jurisdiction.

With that position in mind, if NEC users wish to ensure that disputes cannot be referred to a court prior to each step in the dispute resolution mechanism being complied with, as matters currently stand, even more explicit wording will be required. This could include wording to the effect that the provisions of clause W2.4 are condition precedent; that they act as a contractual bar; and that in the absence of a prior waiver, no court shall have jurisdiction in circumstances where a party does not comply with the provisions of clause W2.4.

That perhaps raises the question of whether parties should include such wording. There are practical reasons why they may wish to ensure their disputes are not put before the courts, not least confidentiality and cost considerations.

In addition, the effect of the Glasgow hospital decision also has potential implications for the timescales for dispute resolution. Most jurisdictions have statutory limitation periods: in Scotland it is 5 years. The client stated the court summons was served at a date which was, in its opinion, close to the expiry of the limitation period. The effect of the decision is that, at some time in the future, the client will be obliged to refer the dispute to adjudication before engaging in court proceedings. How quickly it must do so is unclear. The dispute resolution procedure could take many years, and only after its completion might the dispute on the interpretation of clause W2 come back before the appeal court for a possible final court case to commence.

That is an outcome most contracting parties are likely to want to avoid. It is also one that would appear contrary to the intention of NEC clause W2.4 as an efficient and cost-effective mechanism for the resolution of disputes.

Reference

Vernon J (2021) Scottish court confirms adjudication is a mandatory step under option W2. NEC Users’ Group Newsletter, no. 112 (May 2021), p. 9.