Do the parties to an NEC3 contract incorporating an Option W2 dispute resolution procedure have to adjudicate on a dispute first before they can go to court or to arbitration? This question was discussed in the recent case of The Fraserburgh Harbour Commissioners v. McLaughlin & Harvey Limited [2021] CSOH 8.

Background

The Fraserburgh Harbour Commissioners (FHC) employed McLaughlin & Harvey Limited (MCLH) to carry out works to deepen part of Fraserburgh Harbour. The works commenced in or around November 2012. After completion, FHC argued that there were a number of defects in the works and raised an action for damages in the Court of Session. MCLH argued that, under Clause W2.4 of the contract between the parties, FHC had to obtain the decision of an adjudicator first, before it could refer the dispute to a tribunal for determination. As such, MCLH argued that FHC's court action should be dismissed.

It was an agreed fact that there had been no adjudication before the court action was raised, with a notice of adjudication only being served two days before the debate began in court.

Contractual terms

The parties had contracted on the basis of the terms of the NEC3 Engineering and Construction Contract (June 2005) (with amendments June 2006) (the Contract). Option W2 was incorporated into the Contract.

Clause W2.1(1) contains the usual provision allowing the parties to refer a dispute to adjudication at any time.

Clause W2.4(1), however, applies a restriction on further procedure. It says: "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." The tribunal selected by the parties was arbitration.

Decision by the court

There were a number of arguments put before the court to support FHC's assertion that it was not barred from raising the court proceedings. This included drawing a distinction between bringing a court action which the court could "entertain" and having the court determine the merits of the dispute. FHC argued that Clause W2.4(1) did not restrict FHC's right to commence a court action, even if it could not make a decision on the merits.

However, ultimately, Lady Wolffe preferred MCLH's argument of contractual bar, concluding that adjudication is a mandatory step before a dispute can be referred to the agreed tribunal in accordance with the express terms of Clause W2.4(1).

Comment

The dispute resolution procedure in Option W2 has several unique features that parties must carefully navigate. Clause W2.4 contains two of those features. Under Clause W2.4(1), a dispute cannot be referred to arbitration or to a court unless it has first been decided by an adjudicator. Further, under Clause W2.4(2), a party to a dispute cannot proceed to arbitration or court unless it has formally notified the other party of its dissatisfaction with the adjudicator's decision. These provisions are often overlooked, but they are crucial.

Lady Wolffe's decision deals with the former issue. The result may seem unsurprising given the clear terms of Clause W2.4; however, it is a stark reminder of the importance of adhering to the expressly agreed terms of a contract. This is particularly important when it comes to the issue of prescription. Currently, the law on prescription in Scotland is unsettled, meaning that as well as parties and their advisers having to be alive to the date when a claim might prescribe, they must also ensure that any pre-conditions to raising protective proceedings by way of court action or arbitration are complied with. If not, then as well as the wasted expenditure of raising proceedings, parties' claims may be time barred, and advisers may find themselves open to claims for negligence.

All in all, for the sake of all parties concerned, caution would advise careful assessment of the procedure for raising proceedings under any agreed contract terms (particularly under NEC3). It is essential to consider whether there are any mandatory prerequisites that may stall a timely referral to the tribunal of choice.