The Court has again been asked to wrestle with a contract for works that included construction operations under Housing Grants, Construction and Regeneration Act 1996 (the Act) but also comprised elements that were excluded from the ambit of the Act. For the first time, the Court in Severfield (UK) Limited v Duro Felguera UK Limited [2015] EWHC 3352 (TCC) has had to address how payment terms are affected in contracts that include both construction operations and works excluded from the Act.

Mr Justice Coulson identified the difficulties caused by the exclusions at s.105(2) of the Act and the highlighted the inevitable muddle caused when applying the payment provisions of the Act to a contract which contains works that are construction operations subject to the Act (included works) but also works that are excluded from the Act under s. 105(2) (excluded works), often referred to in this context as hybrid contracts.

“If the contract is a hybrid contract, because it includes for both included and excluded operations, the inevitable result is a muddle”.

The Court confirmed that parties seeking to apply the provisions of the Act to hybrid contracts in payment claims for included and excluded works, the two categories of works should be distinguished in the claims. The decision also contains a useful summary of the recent case law regarding adjudications where a failure to issue timely payment and payless notices in accordance with the Act result in the payment application becoming automatically due and payable. It also highlights the importance of clarity in the form, substance and intent of any interim application if it is to be relied upon.

The Facts

  • The Defendant engaged the Claimant for the design, supply and erection of steel structures and some of those works were included works and other works that were excluded by the Act under s105(2) because they related to power generation. Therefore the relevant contract was a hybrid contract
  • December 2014 – the Claimant submitted interim payment application 15 for circa £3.5m. The application did not make a distinction between the included works and the excluded works
  • January 2015 – the Defendant failed to serve the relevant payless or payment notice
  • Adjudication – the Claimant referred the matter to adjudication on the basis that application 15 had created a notified sum and they were entitled to immediate payment. The Defendant argued that the adjudicator lacked jurisdiction because application 15 contained excluded works. The adjudicator determined that he did have jurisdiction and decided that the Claimant was entitled to payment
  • The Defendant did not pay. The Claimant commenced enforcement proceedings and applied for summary judgment. In an earlier hearing between the parties, Stuart-Smith J held that the adjudicator had not had jurisdiction due to the application containing excluded works. That Judge refused summary judgment to enforce the adjudicator’s decision and gave the Defendant leave to defend the claim
  • 24 July 2015 – the Claimant wrote to the Defendant setting out a “revised claim” for circa £1.4m in respect of what it said related to the elements of work claimed under application 15 that did not relate to excluded works
  • 18 August 2015 – the Claimant issued new proceedings seeking summary judgment for the “revised claim” on the basis that it was an element of the monies claimed in application 15 against which no payment or payless notice had been issued by the Defendant”
  • 19 August 2015 - the Claimant discontinued the original proceedings.

Hybrid Contracts

The Judge made reference to Cleveland Bridge (UK) Limited v Whessoe-Volker Stevin Joint Venture [2010] EWHC 1076 (TCC), where the Court had confirmed that the rights under the Act will apply only to those elements of the works that are construction operations. Excluded works do not have the benefit of the payment provisions of the Act. The Act made clear that it applies “only in so far as it relates to construction operations” and therefore will only be relevant to those aspects of the contract works that are construction operations which are not excluded.

Coulson J affirmed Ramsey J’s approach and went on to conclude that the inevitable result of the drafting of section 105 of the Act and parliament’s intention to exclude certain industries from adjudication was that hybrid contracts will have two different payment regimes and statutory adjudication can only be used for included elements of the works.  

The Revised Claim

The Revised Claim was for £1.4m which the Claimant stated was the value of the included works in application 15 and the value of the works to which the Act therefore applied. The included works had the benefit of the payment provisions of the Act and therefore the Claimant claimed summary judgment on the basis that there had been no payless or payment notice against application 15. The Claimant argued that £1.4m of the circa £3.5m applied for in application 15 had become the notified sum and was due and payable.

The case was unusual as the Court was asked, rather than the adjudicator, to determine whether or not summary judgment would be given on the revised claim as it was alleged that it related back to part application 15 against which no payment or payless notice had been issued.

The Court refused to grant summary judgment on the basis that the claim now made was not an interim payment claim arising out of application 15. The judge was not satisfied that £1.4m could be determined, on looking at the application, to be the notified sum. Application 15 did not indicate which valuations in the application related to included works and/or excluded works; the Claimant was not entitled to pick and choose which parts of the application would become the notified sum.

The judge referred to the ‘flurry’ of cases considered by Edwards-Stuart J regarding employers’ failures to serve payment or payless notices, he quoted the recent cases as authority that payment notices that are the subject of such adjudications must be obvious:

  • Caledonian Modular Limited v Mar city Development Ltd [2015] EWHC 1855 (TCC) – “if contractors want the benefit of these provisions, they are obliged, in return, to set out their interim payment claims with proper clarity”
  • Henia Investments v Beck Interiors Ltd [2-15] EWHC 2433 (TCC) – “…the document relied upon as an interim application…must be in substance, form and intent an Interim Application stating the sum considered by the Contractor as due at the relevant due date and it must be free from ambiguity… it must be clear that it is what it purports to be so that the parties know what to do about it and when”.

Coulson J gave an important reminder that because of the ‘draconian consequences’ of the payment provisions in the Act, the payment notice that becomes the subject of the payment must be clear and unambiguous. It was evident that this was not the case on the Claimant’s interpretation of the application for the present proceedings.

The claim was a revised claim for payment and to have the benefit of the provisions of the Act the Judge found that the Claimant should have presented a fresh payment application for the £1.4m sum.

The purpose of the Act was to encourage simplicity and clarity and the interpretation advanced by the Claimant was inventive, but not a correct approach. For hybrid contracts, in order to rely on the Act it now appears essential that payment applications are clear and set out which parts of the application to subject to the Act and those that are not.

Set-Off

The case also raised an interesting point as set off.  It was noted that the general position is that payments due as a result of the payment provisions or an adjudicator’s decision under the Act cannot be reduced or avoided by way of set off. For hybrid contracts, there is a potential difficulty if set off for counter claims is allowed only for payments relating to excluded works (where the Act does not apply). Although Mr Justice Coulson had already decided no sums were due to the Claimant, he concluded that it is arguable that the defence of set-off could be deployed in full and had it been necessary he would have allowed the Defendant to defend the summary judgment claim by reference to set-off.

Punishment or blessing?

The case highlights the difficulties created by the exemption from the Act for certain industries and the lack of clarity and uncertainty this has created. Mr Justice Coulson’s clear view was that the exceptions under S105(2) are misconceived and that rather than being seen as ‘punishment’, the Act was a ‘blessing’ which should be conferred on all those industries which are currently exempt.