NEC defects dispute must go to adjudication before the court

The decision of the Outer House of the Court of Session is relevant to NEC construction contracts that contain the ‘W2’ option for dispute resolution.

The W2 option provides for disputes to be resolved by an adjudicator in the first instance but does make provision for the potential involvement of a tribunal to finally resolve the dispute – whether a court or an arbitral panel – after the adjudication process is concluded. 

Questions around the interpretation of the W2 option clauses were considered by the Outer House in a case involving Greater Glasgow Health Board (GGBH), which has claimed that it is owed £72.8 million for losses arising from alleged defects identified in the construction of the Queen Elizabeth University Hospital in Glasgow. It raised proceedings against its contractor and other parties to stop its claims from prescribing, as the five-year prescriptive period was about to expire.

Prescription is a concept of Scots law very similar to the English law of limitation, which limits the period a party has to make a claim before the claim is extinguished. Prescription can be interrupted only by raising court, or where provided in a contract, arbitration, proceedings, or by agreement between parties. Raising an adjudication does not stop prescription.

In the case considered by the Court of Session, the contractor and other defenders argued that the action brought before the court by GGBH was incompetent and ought to be dismissed, because the dispute had not first been the subject of an adjudication decision, as required by the contract.

The court noted that there was a difference between an action which was fundamentally incompetent and one where the incompetency could eventually be cured. It considered the position in this case to be essentially equivalent to where court proceedings are raised despite parties having contracted to resolve disputes by arbitration – while the court does not have jurisdiction to determine the dispute if a party insists on applying the arbitration provisions, it is not wholly deprived of jurisdiction. The court considered that, in relation to the interpretation of the clauses under the W2 option in the NEC contract, if the disputes were resolved in adjudication, or parties waived the need to comply with W2, then the court could eventually proceed to decide the dispute.

While Lord Tyre determined that the court action was not incompetent, he considered the right approach was to put it on hold until the requirement to refer the underlying claims to adjudication has been satisfied or parties agreed to waive the requirement to adjudicate. Importantly, service of the summons in these circumstances would operate to stop prescription.