Introduction

17.1 Although Scotland is geographically a part of the United Kingdom, it has a separate and distinct legal system. Over the years, there has been significant statutory convergence between the legal system of England and Wales and that of Scotland. Adjudication falls into that area of convergence, although there remain several distinct differences.

A brief history

17.2 The first adjudication statute in Scotland was the Adjudication Act 1621,² repealed in 2007. The 1621 Act dealt with the provision of creditors’ rights to the lands and estate of a deceased person in settlement of debts. This had long fallen into disuse and had no application in modern construction disputes. Fortunately, a party to a construction dispute, becoming deceased, has not yet arisen in Scotland!

17.3 Adjudication for the construction industry is a relatively new process for Scotland. Previously, arbitration had commonly been used to resolve construction disputes. The roots of arbitration go back to an early statute entitled the Article of Regulation 1695. However, in the 1980s, arbitration procedures were generally recognised not to be fulfilling two of its main objectives, namely speed and certainty. Section 3 of the Administration of Justice (Scotland) Act 1972 introduced a proper procedure. Perversely, the procedure incorporated in that statute, whereby any arbitration, domestic, or international, could be referred to the Scottish courts on a point of law was a significant factor in its downfall.

17.4 Although there was ability to contract out of this provision, most parties did not. As a consequence, so-called “stated cases” were frequently taken to the Scottish courts, rendering the arbitration process anything but speedy. That procedure has now been eclipsed by an entirely new statute in the form of the Arbitration (Scotland) Act 2010. This statute provides either a very limited recourse to the courts on a point of law, or, optionally, no recourse, except under very unusual circumstances. However, the recognition, that arbitration in Scotland was not fulfilling the needs of disputing parties, simultaneously gave rise to the introduction of adjudication. Adjudication now generally takes pole position with arbitration, or litigation, held in reserve.

17.5 Adjudication’s initial introduction into construction came via the incorporation of adjudication as the primary dispute resolution mechanism in the New Engineering Contract (the NEC). In its first edition, published for consultation in 1991 and issued for use in 1993, the adjudication provision emerged as a contractual procedure (as opposed to a statutory provision). In fact, this contract went further, as did its successor contracts, in that adjudication was an essential precondition to appointing “the tribunal” to resolve the dispute. That tribunal could either be arbitral in nature, or a reference to the courts, with the choice being open to the parties when entering into the contract.

17.6 The NEC had general application well beyond construction contracts. However, recognising that there were problems with construction contracts, the United Kingdom government sponsored a review by Sir Michael Latham (published July 1994), which recommended, amongst other things, the introduction of statutory adjudication. This introduction was followed by statutory provisions, which were, however, limited to construction contracts. What comprise construction contracts is defined in the statute and it is in construction where the majority of Scottish adjudications take place. There is nothing to prevent parties, in other industries, from making contractual provisions to resolve their disputes using adjudication, but this is not yet prevalent.

Statutory adjudication

17.7 On 1 May 1998, the Housing Grants, Construction and Regeneration Act 1996 (the HGCRA) [Appendix 1.1] came into force. Its construction part contained two primary groups of provisions, the first being adjudication, the second being payments, both for use under construction contracts. Certain criteria were set out, to which construction contracts had to conform and, if they did not, the terms covering these requirements would be implied into construction contracts by means of “statutory Schemes”. There are separate, but similar Schemes, for Scotland and for England and Wales.

17.8 The HGCRA was subsequently amended by the Local Democracy, Economic Development and Construction Act 2009 (the LDEDCA) [Appendix 1.3]. The amendment to the HGCRA had the stated intention of preventing parties from using underhand tactics in order to subvert the aims of the original legislation. This statute was accompanied by amendments to the related schemes. The amended Scottish Scheme applies to contracts entered into after 1 November 2011.

“Smash and grab” adjudications

17.9 The adjudication provisions remain similar, whereas the payment mechanism has been heavily amended in the LDEDCA. Whilst the new provisions were, no doubt, intended to bring clarity, they impose a heavy burden upon certifiers and employers. The new section of the LDEDCA has led to a spate of adjudications, colloquially known as “smash and grab” adjudications. At the time of writing, the Scottish courts have not yet been faced with enforcement of this type of adjudication, but several disputes are understood to be heading for court. The contractor’s application for payment, which frequently contains hotly contested amounts, becomes the default payment notice and defines the sum due if the payer does not issue a payment notice, or a pay less notice, within the specified time limits. In these situations, adjudicators have been obliged to award the sums claimed in the application for payment, with the merits of the sums claimed being beyond consideration on account of the limited referral to the adjudicator.

17.10 In recent English judgments, it has been established that the payer practically accepts the contractor’s value of the work done by not issuing its own notices. Further, the payer cannot raise a second adjudication to determine a lesser value for the work done at the time of the application for payment, because this relates to the same subject-matter as the original dispute.³ Without any evidence of a breach of contract, or fraud, there is nothing that can be done to allow the adjudicator to examine the proper value of the works under these restricted adjudications.

17.11 Does this mean that a contractor can receive a windfall because the certifier was a day late in producing the payment notice, made a small error, or did not provide sufficient detail in the notice? The courts have only resisted enforcing unjust payments that cannot be easily reversed because the winning party is in an insecure financial position, or it is a post-completion payment. In the case of Galliford Try Building v Estura Limited,⁴ the judge only awarded payment of part of the sum awarded by the adjudicator, because this was effectively the final account and the incentive for Galliford to submit its proper final account should not be removed.

17.12 The English courts have taken a firm line over the validity of applications for payment. Should the application be served on the wrong date,5,⁶ or to the wrong entity, it will be considered invalid and the payment cycle will simply not start. The editors see no reason why the Scottish courts would adopt any alternative stance.