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Monday, 1 March 2021

The Fraserburgh Harbour Commissioners Against McLaughlin & Harvey Ltd

[2021] ScotCS CSOH_8

The question for Lady Wolffe was whether clause W2.4 of the NEC 3 Contract  in the form agreed between the parties operated as a contractual bar to preclude resort to the court (or to arbitration) if a dispute between the parties falling within the scope of clause W2 had not first been referred to adjudication.

FHC wanted to carry out works to deepen part of Fraserburgh Harbour. After completion of the works, FHC identified what it said were defects in the works, arising from the failure to conduct the works in conformity with the contract and the specified methodology. FHC brought an action before the court for damages in excess of £7 million. M&H said that the terms of clause W2 of the contract were a mandatory step prior to the issue of court proceedings. FHC had not referred the current dispute to adjudication. In fact there was a further issue. The “tribunal” provided for in the Contract was “arbitration”.

Clause W2 provided as follows:

“W2.4 (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 notifies his decision a Party is dissatisfied, that Party may notify the other Party of the matter which he disputes and state that he intends to refer it to the tribunal. The dispute may not be referred to the tribunal unless this notification is given within four weeks of the notification of the Adjudicator’s decision.”

M&H referred to the NEC Guidance Notes which state that

“The intention is that all disputes are first referred to and decided by the Adjudicator, who is jointly appointed by the Employer and Contractor and is to act independently of them.” 

“[A] dispute cannot be referred to the tribunal unless it has first been decided by the Adjudicator.” 

Therefore FHC had agreed not to litigate about the present dispute before a court (or, indeed, by way of arbitration) without having first adjudicated upon it. The requirement imposed by clause W2.4 was that adjudication is a mandatory step in a dispute before there can be any referral of that dispute to another tribunal (be that a court or arbitration). FHC had not complied with that mandatory requirement. 

FHC said that the law of Scotland was that an arbitration clause does not entirely exclude the jurisdiction of the court to entertain the suit. It prevented the court from deciding the merits of any dispute. FHC said that clause W2.4 referred “any dispute” arising under the Contract to a private dispute resolution mechanism – i.e. to private judges. Clause W4.1(1) permitted a party to refer a dispute to adjudication. This was to ensure compliance with the right to go to adjudication at any time provided for by section 108 of the HGCRA. Further, given that the contract data defined “the tribunal” as “arbitration”, the words of this clause required that an arbitration could not commence without an adjudication having taken place. The adjudication was therefore a precondition for having the merits of the dispute determined by arbitration. But the clause did not exclude the ability of the court to entertain a suit, even if the merits of any dispute in relation to the matter were to be decided by a private decision-making process. There were no words which sought to exclude or alter the normal jurisdiction of the court, other than by the reference of the dispute to the process of adjudication followed by arbitration. 

FHC maintained that the Contract did not preclude a party from essentially side-stepping the contractually agreed route to resolve any dispute in order to advance directly to the court to do so. Clear words were required to oust the court’s jurisdiction. 

The Judge disagreed. The contract “simply” required that a precondition to resort to the “tribunal” of choice was that there was first an adjudication on the matter in dispute, which was followed by a timeous notice of dissatisfaction with that determination. This was a contractual bar.

FHC’s view was inconsistent with the express words of the Contract, which provided for “any dispute” to be resolved in accordance with the specified procedure, being an adjudication and, if a party was dissatisfied with that determination, an appeal from that to the stipulated “tribunal” (here, arbitration) within the time period specified in clause W2.4 (2). Lady Wolffe said that:

“it is clear from the language used, as well as its interrelationship with other parts of Clause W4.2, that these provisions were intended to be definitive as to the means for determining any disputes between the parties and the sequence in which they were to be taken. On the pursuer’s approach, these provisions could simply be ignored in favour of an unqualified right of direct recourse to the Court without any stipulated timeframe. This would, in effect, permit a parallel regime of dispute resolution which is wholly at odds with the clear words and detailed specification of the means for dispute resolution provided for in the Contract.”

FHC’s approach also made no allowance for and cut across the right to refer a dispute to adjudication. The Judge noted that: 

“so important is the right to refer a dispute to adjudication, that any provision of a contract which frustrates this right is displaced in favour of the adjudication provisions of the Scheme”.

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