The principal themes in Construction Law arising during 2013 in Scotland include developments related to public sector procurement and issues arising from insolvency.

There was also the unusual case of a challenge to enforcement of an adjudicator's decision based on human rights arguments in Whyte & Mackay (W&M) v Blyth & Blyth (B&B).

W&M employed B&B consulting engineers to design the structure for a new bottling plant. W&M took a claim related to alleged defects to Adjudication and obtained an award of almost £3m against B&B.  B&B refused to pay on three grounds, two relating to human rights:

Article 1 First Protocol (A1P1) – Article 1 provides that a party has a right to peaceful enjoyment of their possessions. It was argued that enforcement would not promote any of the legitimate aims and purposes of the HGCRA 1996. There was no issue of ensuring cash flow during the progress of the works and no need for an interim or provisional award. Unusually, it would be possible to litigate the whole case to a conclusion many years before W&M would sustain any loss for remedial works. Even if a legitimate aim could be established, it was said that an unfair burden would be placed on B&B if there was enforcement. Further, B&B would have no security for repayment after a final determination.

Article 6(1) Argument – This provides that in the determination of its civil rights and obligations everyone is entitled to a fair and public hearing within a reasonable time by an independent and impartial tribunal established by law. It was argued that proceedings before an Adjudicator did not meet this test. The hearing and judgment were not public. Adjudication subordinates the correct outcome for a quick result which can result in injustice. Enforcement would require immediate payment of a substantial sum and if W&M became insolvent B&B's position would be prejudiced.

The case ultimately succeeded on the basis of a breach of natural justice. However, in relation to the A1P1 argument, the judge found that an adjudicator's decision does not purport to reflect the parties' true legal rights and obligations. Adjudication is recognised to be "rough and ready" and designed to produce a quick and relatively cheap provisional award pending a final determination. It was said the court's power to refuse enforcement is an important part of the overall scheme although one to be used sparingly so as not to undermine the intended benefits of compulsory adjudications.

In this case it was said there was no general or public interest served by W&M taking the case to adjudication, in particular because the losses would not be incurred for many years into the future. There was no need to have a quick answer on the dispute. The alleged defects were not affecting use of the building. Further if B&B were ultimately successful in defeating the claim, there was no guarantee they would be able to recoup the money. None of the public interest justifications for adjudication in the HGCRA 1996 applied in this case. Even if W&M had seen an advantage in dealing with the issue in adjudication, the private interests of one party cannot justify interference in the other's A1P1 rights.

Whilst competent, it was considered adjudication was "unnecessary and inappropriate" in this case and enforcement of the award would place an "unfair and excessive burden" on B&B.

The Article 6(1) argument was rejected on the basis it was inapplicable, relating to determination of rights where Adjudication does not amount to a final determination.

The case was decided on an unusual set of facts and so far, there has not been a flurry of human rights defences to enforcement actions but time will tell on this.

There were two cases in the Scottish Courts concerning issues of insolvency and the impact of this on enforcement of an adjudicator's award.

Connaught Partnerships v Perth & Kinross Council [2013] CSOH 149 concerned the impact of insolvency on enforcement of an Adjudicator's decision. Connaught had gone into administration in 2010 owing c.£160m to unsecured creditors.  It was anticipated only c.£60k would be available to distribute to creditors.  In 2011, Connaught was awarded £835k in an adjudication against Perth & Kinross Council.  Given Connaught's financial position, if the Council paid, that would amount to a final resolution since there would be no prospect of them receiving the money in subsequent proceedings.

Lord Malcolm considered previous authorities and noted that there was no intention that the adjudication regime should transfer the risk of insolvency to either party.  Its purpose was to decide which party should hold money pending final resolution, on the basis both parties were solvent. He referred to the English solution that, unless the claimant's finances were in much the same state as at the date of the contract or had been made precarious because of the defendant's refusal to comply with the award, and if the claimant was insolvent, a stay of execution would usually be granted.

With reference to Lord Hodge's decision in Integrated Building Services v Pihl UK [2010] BLR 622, he said that the English solution can be achieved in Scotland by the operation of the principle of balancing of accounts in bankruptcy.  The provisional nature of the Adjudicator's decision was important as it was a process designed to facilitate cash flow.  The courts are entitled to use the equitable principle of balancing of accounts to ensure fairness.

Given the circumstances of this case, enforcement was not awarded as it would have amounted to a final resolution since there would be no prospect of the Council being repaid if the Adjudicator's decision was ultimately reversed.  

J & A Construction (Scotland) Limited v Windex Limited [2013] CSOH 170 was an action for enforcement of an Adjudicator's award on the basis that the latest accounts of J & A Construction showed an excess of liabilities over assets.  This, Windex argued, would amount to grounds for winding up of the company as it evidenced that they were insolvent or verging on insolvency. They said the equitable principle of balancing of accounts in bankruptcy should be applied to prevent enforcement or, at the least, that there should be an enquiry into J & A's financial position.

Lord Malcolm made reference to Lord MacFadyen's ruling in S L Timber Systems v Carillion Construction 2002 SLT 997 where a defence to enforcement based on allegations of insolvency failed and Lord Hodge in Integrated Building Services v Pihl UK [2010] BLR 622 where it was said that the principle of balancing of accounts would be "very difficult or almost impossible" to operate when an insolvency was not demonstrated by a formal legal act.  

These previous judgments indicated the court should be wary about refusing enforcement in the absence of "clear or uncontested evidence of insolvency".  

The starting point was said to be to assess whether a company was commercially able to pay its debts given that a company could be creditworthy and entitled to trade even if, on paper, its liabilities exceeded its assets.  All relevant circumstances were to be considered.  A balance sheet deficiency should not necessarily prevent enforcement of an Adjudicator's decision.  Unless Windex could demonstrate there was undisputed insolvency, then the policy of the adjudication regime pointed to immediate enforcement of the award.

Procurement

The rise in the number of procurement challenges continues and cases in the Scottish Courts in 2013 included Hastings & Co (Insolvency) Limited v The Accountant in Bankruptcy and Healthcare at Home Limited v The Common Services Agency. These include some useful pointers for parties bringing such challenges.

In October, the Scottish Government introduced the Procurement Reform (Scotland) Bill 2013.

The Bill includes provisions obliging or requiring contracting authorities to publish procurement strategies and annual procurement reports, to consider including community benefit requirements for contracts valued above £4m and to take into account guidance to be issued by the Scottish Ministers when preparing pre-qualification questionnaires.

If passed, the Bill would enable Scottish Ministers to make regulations as to how Scottish public bodies assess bidder suitability to tender for public contracts in light of concerns over blacklisting and related practices.

Contracting authorities who expect to have a "significant procurement spend" (£5m or more) would be required to publish annual procurement strategies setting out how they intend to carry out regulated procurements then to comply with the strategies set, so far as reasonably practicable.

The Bill also includes an obligation for the contracting authority to publish an annual procurement report to be completed as soon as reasonably practicable after the end of that financial year. It would include a summary of the year's regulated procurements, a review of whether these complied with the authority's strategy, and, if not, a statement of how the authority intends to comply in future, a summary of regulated procurements to be undertaken in the following two years and any additional information the Scottish Ministers may require.

Also in October, the Review of Scottish Public Sector Procurement in Construction by Robin Crawford and Ken Lewandowski was published.  

The report runs to 180 pages and primarily focuses on ways to achieve better procurement in public sector construction. The authors define their vision as "an approach which achieves better collaboration in design-led, efficient and effective public sector construction procurement and which has regard to sustainability in all senses of the word."  

A number of main themes have been identified which the authors consider will support better procurement including:

  • Design led outcome-focussed procurement
  • Consideration of whole life cost at all stages
  • Proportionality of the procurement process to the size and risk of the contract
  • Collaboration
  • Simplification
  • Sustainability
  • Balancing of risk between client and contractor


It is suggested each public body should annually publish a rolling forward pipeline of anticipated spend on construction and that regular forums are held with construction businesses to discuss work pipeline, issues and opportunities. Further, that all projects which are advertised (suggested as works contracts worth £2m+ and services contracts worth £50k+) are advertised on the Public Contracts Scotland (PCS) portal.

Early engagement among clients, users, designers and contractors is encouraged in order to get the design and project brief right from the start.

To deal with the issue of prompt and fair payment, Project Bank Accounts are recommended, as are contractual terms which outline fair payment terms throughout the supply chain. The Scottish Government has already identified a number of projects for trialling of Project Bank Accounts.

There is a recognition that the procurement process and its costs can be disproportionate to the planned spend. New guidelines are recommended to set out best practice including proportionate pre-qualification requirements. The standard pre-qualification questionnaire should be used in a proportionate way relevant to the needs of the procurement. There is encouragement for the use of Quick Quote for contracts with values less than the advertising threshold.

For SME's a support mechanism is suggested to help them understand how to compete for public contracts.

The use of BIM is recommended for central Scottish Government projects with a view to encouraging its adoption across the entire public sector. The objective is that construction projects across the public sector adopt a BIM Level 2 approach by April 2017.

The authors of the report suggest that the guiding principle to be applied in implementing their recommendations is "to seek to reduce costs by removing unnecessary procedures and simplifying the procurement process."

The report's recommendations generally are to be welcomed but it will be over to Government now to implement them.


Shona Frame is a Partner at MacRoberts LLP. She has dual accreditation by the Law Society of Scotland as a Specialist in Construction Law and in Arbitration Law. She can be contacted on shona.frame@macroberts.com

This article was first published in Construction Law.