In this recent case the Court held that a contractual payment mechanism that is compliant with the Housing Grants, Construction and Regeneration Act 1996 will apply to all payments under a "hybrid" contract. This will include payments due in respect of both construction works and works excluded from the definition of construction operations under the Act.

The Law

The Act applies to all “construction operations” save for a number of exceptions, set out in section 105 (“nonconstruction operations”). These exceptions include activities on power generation projects which concern plant, machinery or supporting steelwork.

This exception can cause difficulties on contracts where there is a mix of construction and non-construction operations (“hybrid” contracts), in particular as regards the extent to which the payment and adjudication provisions in the Act apply. This was the issue considered by the TCC in the recent case of C Spencer Limited v MW High Tech Projects UK Limited. 

The Facts

MW High Tech Projects UK Limited (“MW”) was engaged as the main contractor to design and construct a power plant in Hull. C Spencer Limited (“CSL”) was subcontracted by MW to design and construct the civil, structural and architectural works. As such, the subcontract included both construction operations and nonconstruction operations which fell into the exceptions set out in section 105 of the Act, i.e. the assembly of plant and erection of steelwork to provide support or access to plant and machinery.

The sub-contract provided for periodic interim payments, but made no distinction between construction and nonconstruction operations. The payment mechanism in the sub-contract was compliant with the Act.

In February 2019 CSL issued a payment application which clearly distinguished the amounts payable in respect of (a) construction operations and (b) non-construction operations. MW subsequently served a payment notice indicating a negative sum due to CSL. MW’s payment notice did not allocate/divide the sums due between construction and non-construction operations and made no comment as regards the fact that CSL’s application had made such a distinction.

CSL argued that MW’s payment notice was invalid as it failed to identify the proportion of the sum assessed that was due in respect of construction operations under the Act, and the basis on which that sum had been calculated. 

Decision

The Court held that the payment scheme in the subcontract applied to both the construction operations and the non-construction operations excluded from the Act. .

It was noted that, whilst parties cannot contract out of the statutory payment regime set out in the Act, it is open to them to agree a contractual payment scheme that is Act compliant. Such a scheme, as was the case here, would comply with the statutory provisions in respect of construction operations and non-construction operations. As such, any payment notice issued under the terms of the contract would be valid under both the contract and the Act.

The earlier case of Severfield (UK) Ltd v Duo Felguera UK Ltd (2015) was distinguished on the basis that, unlike the subcontract, the payment scheme agreed in the contract between the parties did not comply with the payment provisions in the Act. Thus a distinction between the sums due for construction operations (for the Act would imply a compliant payment regime) and those due for nonconstruction operations had to be made.

Where the parties have contractually agreed a payment scheme compliant with the Construction Act, so that only one payment system is in operation, there is no need to distinguish between construction operations and non-construction operations in any payment application or notice. Accordingly, the TCC found that the payment notice issued by MW was a valid response to CSL’s application and rejected CSL’s claim

It should be noted that the right to refer disputes to adjudication under the Act is similarly confined to disputes in respect of construction operations. A right to adjudicate should therefore be expressly included in any “hybrid” contract. If it is not, there is potential for difficulties to arise as regards adjudication of disputes which relate to a mix of construction and Act excluded non-construction operations.

Summary

This case confirms that it is important that an Act compliant payment mechanism and a right to adjudicate are expressly included in every hybrid contract. In the absence of such provisions, there is potential for confusion and dispute as regards the operation of two separate systems for construction operations and non-construction operations excluded from the Act.

An express right to suspend for non-payment which reflects the Act should also be included in hybrid contracts as otherwise there may also be confusion as to when the right arises.