UK: Changes To Scottish Commercial Court Rules And The Implications For Construction Disputes

On January 2005, the Scottish Courts amended their Practice Note for the Rules on Commercial Actions in the Court of Session. The amendments were introduced in response to a review which noted a dissatisfaction with the practice of the Court and recommended changes. The conduct of construction & engineering disputes received particular attention in the review.

Construction disputes account for a significant proportion of actions raised in the commercial court of the Court of Session. They may yet be the subject of a specific Protocol. This was the recommendation of the review committee. Until then, like any other commercial disputes, construction disputes will be subject to the Practice Note without distinction.

What makes construction disputes different?

• They are often high value.
• They can involve complex factual, legal and technical issues.
• Very often, many of these issues are discrete.
• Where proof is required the hearings can run to several weeks as witnesses, factual and expert, detail the progress of the project in dispute
• Many expert witnesses in different roles can be involved in single cases.
• The clients are sophisticated, and often regular, consumers of dispute resolution services, with experience of different means of dispute resolution and different jurisdictions.

The Commercial Court, in its current form, was introduced into Scottish court procedure in 1994. At that time arbitration dominated construction & engineering disputes. The new court procedure offered a fast and flexible procedure that was an attractive alternative to parties. However, radical developments outside of the courts have occurred since then. These are the introduction and success of statutory adjudication and the decline of arbitration.

The construction industry is unique insofar as Parliament has legislated to impose a form of dispute resolution procedure upon its contracts. The Housing Grants, Construction and Regeneration Act 1996 gave the parties to a construction contract, the right to have a dispute determined by a procedure called adjudication. The parties' contract requires to make provision for such a procedure and if it does not then secondary legislation introduced by the Act – the Scheme for Construction Contracts –provides the mechanism for the adjudication process.

Adjudication has the following key features:

• It is available to a party at any time and for any type of dispute – there is no restriction on the value of the sums claimed in adjudication;
• The process is initiated by the claimant who need not even ask for the identity of an adjudicator to be agreed – if the contract does not name an adjudicator then he can have one appointed by an Adjudicator Nominating Body.
• The adjudicator has to reach a decision within 28 days although there is limited opportunity to extend this period.
• The decision is not final but is binding in the interim – the paying party has to make payment in the meantime, but may have the dispute "re-heard" by an arbitrator or court. The parties may agree to leave matters on the basis of the adjudicator's decision either expressly or by simply not pursuing it further.

In practice adjudication has proved to be hugely popular. A party can obtain payment within a couple of months, even in the case of a complex and highly contentious dispute. As a result adjudication dominates construction disputes. There is however still a role for the courts in the following respects:

• enforcement of adjudicators' decisions;
• cases unsuitable for adjudication; and
• final resolution of disputes which have been to adjudication.

It is worth noting that few cases are entirely unsuitable for adjudication because progress can be made in dividing up the issues or heads of claim and dealing with each in turn. Also, very few cases which have been the subject of an adjudication decision go on to be heard again in arbitration or in court. (This is more likely to be an indictment of arbitration and the courts rather than a positive endorsement of adjudication.)

There are limited exclusions to the coverage of the Act and so there will be disputes which would be considered to be "construction disputes" but would not concern construction contracts as defined by the Act and thus are not subject to statutory adjudication.

Arbitration has declined as a dispute resolution process in the construction industry. It dominated for many decades – primarily due to the fact that it was prescribed by the standard forms drafted by joint industry bodies, but also in recognition of the value in having industry professionals dealing with disputes which are often of a technical nature. Dissatisfaction with arbitration was growing prior to the introduction of adjudication. It was perceived as slow and expensive, unnecessarily aping court procedures and frequently the subject of delays while points were taken under the Stated Case procedure – a statutory right that enables a legal point to be taken to the Scottish appeal court. Increasingly, parties deleted the arbitration provisions in their amendments to the standard forms and the drafting bodies themselves started to make it an option, along with court, rather than compulsory.

The commercial court initially benefited from comparisons with arbitration. Like arbitration it had a single judge dealing with the case from beginning to end, but it was envisaged that it would be more flexible and, of course, it lacked the arbitrator's fees. However the advent of adjudication has created an expectation within the industry – the commercial court's potential "customers" – that disputes can be resolved within a very short period of time. The length of both court and arbitration proceedings stands in stark contrast to adjudication. Most clients would accept the differences between the interim resolution of disputes in adjudication and their final resolution in court/arbitration, but the difference in time and cost is simply too great.

Arbitration bodies are attempting to bridge this gap with faster processes, learning the lessons from adjudication. The challenge for the courts – particularly the commercial court – is not to fall behind.

Dissatisfaction with the existing practice of commercial actions in relation to construction & engineering disputes was cited by the review committee as one of the reasons for its constitution and hence the issue of the Practice Note. The particular concern expressed in the committee's discussion paper on construction disputes was that the court was not dealing pro-actively with those disputes having regard to the tools available to it. Also, the lengthy proofs common with construction disputes were resulting in large periods of court time being ring-fenced and unavailable to other actions.

The committee's discussion paper went on to suggest early identification of the issues in dispute and a structured approach to such cases with discrete issues being dealt with using a variety of means of disposal including the use of assessors, more control over the parties' experts and partial proofs – the implication being that these are insufficiently used at present.

Against the background of heightened expectations in the industry and the specific problems identified with the existing practice of the Commercial Court, how will new Practice Note impact upon construction disputes?

It has often been suggested that the Commercial Court is intended for focussed disputes that can be readily disposed of in a short period; that it is good for quick decisions on a point of principle. According to this view the multi-faceted construction dispute serves simply to clog up the court diary. However, it is clear from the committee's report that there was no appetite for amending the Rules to exclude construction disputes from the remit of the Commercial Court and the Practice Note does not do so.

The most innovative element of the Practice Note is the introduction of a requirement on the parties to ascertain their respective positions in relation to the dispute before commencing proceedings. This mirrors recent practice in England and Wales. The requirement should have no more significant effects for construction disputes than for any other type of commercial disputes, however, a comparison with the Pre-Action Protocol for Construction & Engineering Disputes in England and Wales does highlight some differences in approach.

The English Protocol is, of course, specific to construction & engineering disputes whereas the Scottish Practice Note is not. This has the advantage that particular issues – such as the relationship with adjudication – are dealt with in the English Protocol. Thus enforcement of adjudication decisions and the "re-hearing " of adjudicated disputes are excluded from the English pre-action requirements.

The English Protocol prescribes periods for the exchange of communications whereas the Scottish Practice Note does not. This has the advantage of flexibility in the different types of cases that come before the Court but it does create uncertainty for parties and their advisors, at least until experience of the court's approach to the Practice Note becomes established.

The English Protocol spells out the content of the communications in greater detail.

Defendants in England and Wales are expected to respond in detail with express acceptance or rejection of facts and claims; in Scotland they merely set out their position in "substantial terms".

Copies of documents relied upon do not need to be sent in England and Wales unlike in Scotland.

Expert reports are subject to a more exacting regime in Scotland. In England and Wales, the Protocol only requires the claimant to intimate the names of any experts already instructed and the identification of the issues to which that evidence will be directed. The defendant requires to do likewise in the response. In Scotland, the reports themselves require to be exchanged. Although a claimant may be able to set out the basis of his claim in a pre-action letter without undue delay, the necessity of instructing, obtaining and exchanging expert reports before commencing a commercial action has the potential for significantly delaying proceedings.

There is no express requirement for the parties to meet in Scotland but as the dispute requires to have been "the subject of careful discussion" then this may be envisaged.

The sanction for a party's failure to comply with the pre-action requirements is an award of expenses (costs) on an enhanced scale if greater procedure is required in the action to deal with matters that ought to have been addressed before it commenced.

Alternative Dispute Resolution ("ADR")/Mediation has suffered at the hands of statutory adjudication. Despite the many benefits of mediation – for example, the control of the process and the preservation of long-term relationships – adjudication has proved to be too immediate and thus too tempting to claimants. As a result parties are more likely to contemplate mediation either when adjudication is not available or post-adjudication, when the dispute may be working its way through court or arbitration.

The Civil Procedure Rules reforms in England and Wales have clearly been a boost for mediation and as a result many more construction disputes are being mediated. Those Rules have introduced a degree of compulsion in the use of mediation through the threat of awards of expenses, but parties have responded positively with some success. This is building a familiarity with the process among clients. When those clients have disputes in Scotland they are far more receptive to mediation and indeed often press for it to be used.

The reference to ADR in the Practice Note is very limited – merely an a suggestion that the parties may wish to consider whether the dispute is suitable for ADR. It is unlikely that this will be a driver for a greater take-up of the process.

The relationship between the Scottish courts and methods of alternative dispute resolution is to be the subject of greater consideration and discussion by the judiciary in the coming year.

As will be apparent from the foregoing discussion, construction and engineering disputes would benefit from a protocol specifically directed at such disputes. This would give greater certainty as to the application of the Rules and Practice Note in relation to those issues specifically encountered in construction disputes (for example, the relationship with adjudication).

More generally however the requirements for pre-action communications and the early identification of issues at the preliminary hearing should – if enforced – provide the basis for the efficient management of construction disputes. It remains for the commercial judge, using his or her existing powers, to determine the best means of dealing with the various parts of the dispute.