A Court of Appeal decision last week is the first to provide authoritative guidance as to the approach to be taken to hybrid contracts under the Construction Act. Such contracts arise as a result of limited exemptions in the Act for certain activities in relation to power generation projects and other specified engineering facilities. Contracts for such projects often involve a mix of operations, some of which will be caught by the Construction Act and some of which will fall within the exemption, which in turn can lead to difficult issues as to the applicable payment and adjudication procedures.
The power generation exemption
The Housing Grants, Construction and Regeneration Act 1998 (the “Construction Act”) applies to “construction operations” carried out within the United Kingdom, subject to a certain narrow set of exemptions provided for by section 105, which include the:
“assembly, installation or demolition of plant or machinery, or erection or demolition of steelwork for the purposes of supporting or providing access to plant or machinery, on a site where the primary activity is … power generation”
The exemption also applies to certain other engineering projects such as nuclear processing and sewage treatment plants.
There have been a number of cases over the years which have explored the width of this exemption:
- generally speaking, a narrow approach is to be taken to the exemption, the intention being not to exempt the whole of these projects from the Construction Act, but only those activities concerning plant, machinery or supporting steelwork;
- some latitude is allowed in the interpretation of the words “plant” and “machinery” – so long as individual items of work play some part in the overall process carried out by the plant or machinery (such as conduits or electrical wiring necessary for its operation), they will fall within the exemption; and
- only the specified activities in relation to plant, machinery or supporting steelwork are excluded, so a contract involving the design, fabrication and installation of supporting steelwork would fall within the Construction Act insofar as its design and fabrication elements are concerned, but not insofar as erection of the steelwork is concerned.
The rationale for such a narrow exemption has been often criticised by the judiciary. One former TCC judge described it as “uncommercial, unsatisfactory and a recipe for confusion” and not “thought through”, and the TCC judge in the case described below referred to it as having an “illogical and uncommercial impact”. Parties can be caught out if they overestimate the width of the exemption and wrongly assume that the Construction Act does not apply to their contract, as was the case in Severfield (UK) v Duro Felguera UK (for our Law-Now on that case please click here).
In this case, conversely, the parties were aware (at least at the time of the dispute) that their contract was a hybrid contract consisting of both construction and non-construction operations, and the issue before the Court was how the requirements of the Construction Act should be applied in those circumstances.
C Spencer Limited v MW High Tech Projects UK Limited
This case involved a Waste-to-Energy plant in Hull. MW was engaged as main contractor and appointed CSL to design and construct civil structural and architectural works on the facility.
The subcontract included construction operations (for the purposes of the Construction Act) as well as non-construction operations – being the assembly of plant and erection of steelwork to provide support or access to plant and machinery.
A payment dispute arose after CSL issued a payment application which split the amounts applied for into construction operations and non-construction operations. MW’s subsequent payment notice, however, did not distinguish the two amounts, but just assessed the overall amount due. CSL challenged its validity on the basis that it failed to identify that part of the amount assessed as due in respect of construction operations (as defined by the Construction Act), and the basis on which that amount had been calculated.
The Court of Appeal upheld the TCC’s original decision that whilst it was correct that the Construction Act only applied insofar as works were construction operations, the parties were free to agree that the payment terms could apply equally to all operations under the contract. The Construction Act requirement for a contract to provide for the giving of payment notices only applies insofar as a contract relates to construction operations, but that does not mean the requirement cannot be satisfied by a contractual term covering both construction operations and non-construction operations.
That was the case here where the parties had incorporated Act compliant payment terms which could apply equally to all operations. This differed to the situation in the Severfield case mentioned above where the contractual payment terms were not Act compliant. In that case the Construction Act implied the Scheme provisions in respect of the construction operations, but did not have the reach to do so in respect of the non-construction operations, meaning that two separate regimes operated in parallel.
Conclusions and implications
This decision provides authoritative guidance affirming the practice of including Construction Act compliant payment provisions within hybrid contracts which apply to the whole of the works. This is a pragmatic and sensible outcome which avoids forcing employers or main contractors to divide up payment notices for such projects into construction operations and non-construction operations. Such a dividing up would have posed particular difficulties for milestone-based payment regimes, which are prevalent on power generation and other engineering projects falling within the section 105 exemption.
The Court’s decision therefore confirms that the dividing up of payment applications and notices in this way, as was required in the Severfield decision, can be avoided by ensuring that Act compliant provisions are drafted to apply to the whole of the works.
The same point applies to adjudication. The Construction Act provides a right of adjudication in relation to construction operations only, giving rise to the potential for parallel dispute resolution procedures and jurisdictional challenges in the absence of jurisdiction being conferred on an adjudicator contractually in relation to non-construction operations. That is exactly what happened earlier in the history of the present case when CSL abandoned an adjudication in response to a jurisdictional challenge by MW that no right to adjudicate non-construction operations had been agreed in the subcontract.