REUTERS | Mike Hutchings

You must adjudicate before you can arbitrate

I often wonder how much time parties spend on looking at the dispute resolution clauses in their contracts.  Before work starts they might ponder whether they want to arbitrate or litigate at the end of the day (and draft the contract accordingly), but do they really pay attention and debate the benefits of a tiered dispute resolution clause? You know the sort of thing I mean, where the parties agree to having senior individuals meeting, or mediating (or both), before they refer a dispute to adjudication or get embroiled in court/arbitration proceedings.

I realise that tiered dispute resolution clauses might not work so well if the parties are parties to a construction contract, since they have a right to refer a dispute to adjudication “at any time” but, just having the right to do so, shouldn’t stop parties trying to agree to resolve their differences before any notice is served.

However, regardless of whether the parties are parties to a construction contract, if they have a tiered dispute resolution clause in their contract, one thing they shouldn’t do is jump in at the deep end, missing out a step or two on the way. We know the judges don’t like this and Lady Wolffe (in The Fraserburgh Harbour Commission v McLaughlin & Harvey) is the latest to pass judgment on this type of behaviour.

The Fraserburgh Harbour Commission v McLaughlin & Harvey

The parties entered into a NEC3 Engineering and Construction Contract (ECC) for works to the north harbour at Fraserburgh. After the works were complete, Fraserburgh Harbour Commission (the employer) alleged they were defective. However, rather than referring the dispute to adjudication, it went ahead and issued court proceedings alleging breach of contract and claiming over £7 million in damages.

Pausing there, it is worth mentioning that as this was an NEC3 contract subject to the Construction Act 1996, it included clause W2. As we all know, clause W2 provides that the parties will refer a dispute to adjudication before referring it to the tribunal, which can be arbitration or the courts (here the parties had opted for arbitration). A party also has to serve a notice of dissatisfaction within four weeks of the adjudicator’s decision before doing so. It is a simple tiered dispute resolution clause. As there had been no adjudication, there was no notice of dissatisfaction and so there could not be a referral to the tribunal. Therefore, it is unsurprising that McLaughlin & Harvey (the contractor) argued that there was a contractual bar to what the employer had done.

I’m no expert on Scottish court proceedings so will not attempt to explain the legal arguments the parties advanced on whether the court had jurisdiction to hear the claim given the tribunal was stated as arbitration, or whether there was any utility in a court action that could not determine the merits of the dispute. Suffice it to say, Lady Wolffe agreed with the contractor that there was a contractual bar, that adjudication was a mandatory first step in the dispute resolution process the parties had agreed.

I thought her discussion about the correct construction of clause W2.4 was interesting and she made a number of points that are worth mentioning, like:

“… 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

Or that:

“On the [employer’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.”

She said this would “render nugatory the expressly stipulated terms of Clause W2.4”. Also that:

“On the [employer’s] approach, the [contractor] is being denied the advantages and speed of that contractually-agreed first mode of dispute resolution.”

Adjudicate before arbitrating

It isn’t surprising that Lady Wolffe decided that the parties had to adjudicate before arbitrating, after all, it is what most of us think that clause means (and it is some time since Edwards-Stuart J’s judgment in Anglian Water Services Ltd v Laing O’Rourke Utilities Ltd confirmed this to us).

It is usually straightforward to work out whether the parties have complied with clause W2 at the end of a job, when they are arguing over the final account or, as here, when one party alleges there are defective works. However, it is not so straightforward when one or more adjudications took place while the works were on-going. As the arbitrator in those circumstances, it can be far more challenging trying to decide whether the dispute (or parts of it) have been the subject of an adjudicator’s decision. It may give rise to the arbitrator issuing an award on jurisdiction and may not yield the result one of the parties wants.

It can also be complicated for an adjudicator who is asked to adjudicate a dispute on an ongoing contract. This will involve having to consider the binding effect of previous adjudicators’ decisions, something that can be particularly complicated if the parties have also arbitrated in respect of some (but not all) of those previous adjudicators’ decisions.

Then there is the notice of dissatisfaction, which is required to ensure the adjudicator’s decision does not become finally binding by default. This can add an unwanted twist to events. Further, even without a notice of dissatisfaction, I’ve seen it argued that if a previous adjudicator’s decision is unenforceable, then it is a nullity in any event. (On this, I think you need a court judgment to confirm it is unenforceable, whether because of a jurisdiction or natural justice challenge, or as a result of a successful Part 8 declaration, like you might get in the event of a non-monetary award.)

As NEC contracts are now the contract of choice in a lot of cases, all of those involved in dispute resolution will be starting to see more and more disputes involving NEC contracts. I know I am. I suspect these complications will become more commonplace.

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