Do disputes under NEC3 and NEC4 engineering and construction contracts have to be referred to adjudication?

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In the case of Fraserburgh Harbour Commissioners (Authority) v McLaughlin & Harvey Limited (MHL) the Scottish Court of Session determined that adjudication was a mandatory first step that must be taken before bringing any further proceedings in relation to an NEC3 Engineering and Construction Contract.

Background

The Authority appointed MHL in November 2012 to carry out works to deepen the North Harbour of the Fraserburgh Harbour (Project) under an NEC3 Engineering and Construction Contract, version June 2005, as amended in June 2006 (NEC3 ECC).

Option W2 was adopted in the Contract Data part 1. Paragraph W2.1 said “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.”

Paragraph W2.4 (1) – (3) stated 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 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.

(3) The tribunal settles the dispute referred to it…”

Following completion of the works, the Authority alleged a number of defects and argued that the works had not been carried out in conformity with the NEC3 ECC. It claimed damages in excess of £7 million. It chose not to refer the matter to adjudication, but instead instigated court proceedings as the limitation period in which the claim should be brought was soon to expire.

MHL contended that it was mandatory under Option W2 to refer the dispute to adjudication first, prior to referring the dispute to the chosen tribunal. The Authority argued that the jurisdiction of the court was not removed by the contractual dispute resolution procedures.

Judgment

Lady Wolffe disagreed with the Authority and decided in favour of MHL. The adjudication was a mandatory first step that must be taken before bringing any further proceedings.

She also rejected the Authority’s argument that, in order for its action for damages to avoid being time barred, the action should be formally paused to allow adjudication and if necessary, arbitration, to take place.

Comment

Although this is a Scottish case, this judgment is likely to be followed by the English courts in giving effect to the widely used dispute resolution provisions in the NEC3 ECC contract, as well as in the NEC4 suite of ECC contracts, which adopt the same language.

The standard NEC3 and NEC4 ECC contracts provide for the Employer to choose which Dispute Resolution Procedure applies to the contract and to fill in the Contract Data part 1 accordingly. The Employer has to choose which adjudication option applies. The choice is Option W1 or W2. Option W1 should be chosen where Part II of the Housing Grants, Construction and Regeneration Act 1996 (Act) does not apply to the contract i.e., if it is not a Construction Contract for Construction Operations within the meanings in the Act. Option W2 should be chosen when the Act does apply.

Whether Option W1 or W2 is adopted, contractors and employers who fail to adjudicate prior to instigating court or arbitration proceedings, risk falling foul of the contractual provisions and incurring needless litigation costs.

This decision does not have universal effect across other industry contracts, such as the JCT suite of contracts. Whether adjudication is a pre-cursor will depend on the wording of the contract.

For more specialist legal advice please get in touch with Lucilla Waugh on 0191 211 7984 or email [email protected]