Can you skip the adjudication step?

Escalating dispute resolution provisions that contain a series of steps to resolve disputes are increasingly common and can be useful in focusing issues or reaching resolution. However, where it is a requirement for each step to be followed before moving on to the next and there are issues of time bar, they can be problematic.

The operation of the NEC3 provision requiring disputes to be referred to adjudication before resorting to the tribunal (whether court or arbitration) was considered by the Court of Session in Greater Glasgow Health Board vs Multiplex Construction Europe Ltd and Others.

The health board raised an action against a number of defenders in relation to alleged defects in the construction of the Queen Elizabeth University Hospital in Glasgow.

The main contractor and project supervisor, whose contracts were on NEC3 forms, argued that each step of the dispute resolution procedure had to be followed in turn and so a court action could not be raised before first adjudicating. As there had been no adjudication, the court action was incompetent and should be dismissed.

The importance of this point was that the action had been raised just before the expiry of the time bar period so that if the action against those defenders was dismissed, it was possible the health board’s right to pursue the case would have expired.

The decision confirms that a court action can validly be raised to protect a party’s position on time bar, notwithstanding an escalating dispute mechanism with mandatory prior steps

The health board argued the action should be allowed to proceed without adjudicating as the complexity of issues and multiple parties said to be jointly and severally liable made it unsuitable for adjudication. This matter could require as many as 22 adjudications with no possibility of joint and several liability and a risk of inconsistent decisions. The parties should not be taken to have agreed such an “obviously inappropriate” means of dispute resolution. Alternatively, it said that the action should be put on hold to allow adjudication to take place.

The defenders’ position was that the requirement to adjudicate did not change because there were a number of parties or issues. Disputes were not excluded from adjudication because they were complex. If multiple adjudications were required, then that was as a result of the contract terms agreed by the parties.

The court did not accept that the action was incompetent or that it should be dismissed. It drew parallels with arbitration: pending any reference to arbitration being concluded, the court’s jurisdiction to determine the dispute was “in the meantime” ousted. The court was prevented from dealing with the dispute while it was still to be decided by an adjudicator, but that did not make the action incompetent. It simply meant the court could not entertain the dispute until the adjudication process was concluded. A sist was appropriate rather than dismissal.

The case serves as a reminder that it is worth thinking through, at the point of entering into contracts, how escalating dispute mechanisms will work in practice

The court supported the comments by the Supreme Court in Michael J Lonsdale vs Bresco Electrical that adjudication is designed to be a mainstream dispute resolution process in its own right. There was nothing about the claims in the action which made them inherently unsuitable for adjudication. If the parties had wanted to exclude complex disputes or disputes where joint and several liability was an issue from the dispute resolution process requiring adjudication before court, they could have done so. Instead, they entered into contracts in terms of which “any disputes” may be referred “at any time” for adjudication. It was recognised that this could lead to multiple adjudications but was not accepted that the issues were so complex that an adjudication process would be bound to fail.

The decision is helpful in confirming that a court action can validly be raised to protect a party’s position on time bar, notwithstanding an escalating dispute mechanism with mandatory prior steps, albeit the action will then be put on hold pending the steps being followed.

The case does, though, highlight the sort of satellite dispute that can arise from escalating dispute provisions. In this case, there will now need to be a series of adjudications against the relevant parties. Win or lose, the losing party or parties may still want matters dealt with in court, particularly where there is an issue of joint and several liability which it will not be possible to deal with in adjudication. If the contract simply provided a right to adjudicate but not an obligation to do so, then there is more flexibility for parties to take a view on what is appropriate in the circumstances.

An alternative could be an ability to conjoin adjudications in a situation like this but that can be complex both to draft and to operate in practice and would only work if all the possible defenders were bound into the same provisions.

The case serves as a reminder that it is worth thinking through, at the point of entering into contracts, how these escalating dispute mechanisms will work in practice and about the types of disputes that could arise out of the contract.

Shona Frame is a partner and Kathryn Moffett an associate at CMS Cameron McKenna Nabarro Olswang