Neutral citation: Fraserburgh Harbour Commissioners v McLaughlin & Harvey Ltd [2021] CSOH 8

NEC contract topics: Dispute resolution provisions, Option W2

Form of contract:  NEC3 Engineering and Construction Contract (June 2005, amended June 2006

Main areas of law: Adjudication under the Housing Grants, Construction and Regeneration Act 1996, jurisdiction and procedural bars.

 

Fraserburgh Harbour Commissioners (FHC), the statutory harbour authority for Fraserburgh Harbour, entered into a contract with McLaughlin & Harvey (M&H) to deepen part of the North Harbour. The purpose of the works was to accommodate larger vessels and improve port efficiency. The contract used was the NEC3 Engineering and Construction Contract (June 2005, amended June 2006), incorporating Clause W2 for dispute resolution. The contract specified arbitration as the tribunal and stipulated that the law governing the contract would be that of Scotland.

Following completion of the works, FHC identified what it claimed were defects in the execution of the contract. It alleged that M&H had failed to carry out the works in compliance with the agreed methodology and specifications. FHC initiated court proceedings and sought damages in excess of £7 million for breach of contract. M&H opposed the proceedings on the basis of Clause W2.4, arguing that any dispute must first be referred to adjudication before it could be taken to arbitration or court. At the time the action was raised, FHC had not referred the dispute to adjudication, although it had given notice of adjudication shortly before the court hearing. Clause W2.4 stated:

 

“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.”

 

Clause W2.4 also states that a party dissatisfied with the adjudicator’s decision is not permitted to refer the dispute to the tribunal unless notice is given within four weeks of the adjudicator notifying their decision.

 

The key issue was whether Clause W2.4 of the contract operated as a contractual bar to litigation or arbitration where the dispute had not first been adjudicated.

M&H argued that Clause W2.4 imposed a mandatory procedural step, requiring adjudication before any referral to arbitration or court. The company submitted that FHC had not complied with that contractual condition and was therefore barred from bringing the action.

FHC accepted that it had not referred the matter to adjudication at the time of initiating proceedings but contended that Clause W2.4 did not entirely remove the jurisdiction of the court. FHC relied on Scottish authority to argue that contractual dispute resolution mechanisms, including arbitration, did not oust the court’s jurisdiction unless this was done by clear words. It submitted that the clause did not preclude the court from entertaining a suit to prevent claims from being extinguished by prescription. The court had to determine whether Clause W2.4 was enforceable as a contractual bar and whether the action could proceed in the absence of adjudication.

 

Lady Wolffe concluded that Clause W2.4 did constitute a contractual bar. The clause required that any dispute be first determined by adjudication, followed by a timeous notice of dissatisfaction, before it could be referred to arbitration. Since the parties had designated arbitration as the tribunal, this sequence of steps had to be respected. In her words:

 

“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.”

 

The court rejected the argument that Clause W2.4 could be bypassed by directly raising an action in court. Lady Wolffe stated that to do so would amount to ignoring the detailed and specific dispute resolution procedure agreed by the parties, effectively creating “a parallel regime of dispute resolution which is wholly at odds with the clear words” of the contract. She further found that FHC’s position failed to give effect to the significance of the statutory right to adjudication under the 1996 Act:

 

“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.”

 

As no adjudication had taken place at the time of the action, and no ancillary orders were being sought (such as enforcement of an adjudicator’s decision), the court concluded that the present action served no live purpose. Accordingly, the action was dismissed based on the contractual bar.

 

The decision reinforces the primacy of the dispute resolution mechanisms agreed in NEC3 contracts and confirms that parties will be held to the dispute resolution cascade set out in Clause W2.4. The ruling highlights several practical implications for those engaged in NEC-based construction projects:

Firstly, it affirms that adjudication is not merely optional under Clause W2.4 where it is adopted. Instead, it is a mandatory step in the dispute resolution sequence. A party may not proceed to arbitration or litigation without first referring the dispute to adjudication.

Secondly, the court’s treatment of Clause W2.4 as a contractual bar underscores the importance of following the procedures agreed in NEC contracts. Attempting to bypass adjudication, even to preserve claims from time-bar, will not be permitted where the contract mandates a preliminary adjudication step.

Thirdly, while the court acknowledged that it retains jurisdiction in ancillary matters or in cases where alternative dispute resolution proves abortive, such jurisdiction does not extend to deciding the merits of a dispute in breach of a mandatory adjudication provision.

Finally, the case serves as a cautionary note for contracting parties in the construction industry to ensure that any dispute resolution steps, especially where NEC contracts are used, are properly sequenced. Raising proceedings prematurely risks dismissal and wasted costs.

For construction law practitioners and those administering NEC contracts, this judgment is a clear signal that the courts will respect and enforce the dispute resolution frameworks embedded in the contract, particularly where those frameworks align with statutory provisions as provided for in the Housing Grants Construction and Regeneration Act 1996.