Hidden compliance risks: How the Construction Act impacts energy projects

Despite being nearly three decades old, the Housing Grants, Construction and Regeneration Act 1996 (also known as the Construction Act) remains a critical piece of legislation for anyone involved in UK construction projects - including those in the energy sector.

Yet, many developers, contractors, and consultants working on energy infrastructure are unaware that the Act's payment and adjudication provisions can apply to their contracts. This oversight can lead to non-compliance, exposing parties to legal and financial risk.

Here, we explore how and when the Act applies to energy projects, what happens if it does, and what steps stakeholders should take to protect themselves.

Why is the Construction Act relevant?

In brief, the Act applies to "Construction Contracts" which relate to the carrying out of "Construction Operations" in England, Wales or Scotland. To explain further:

• A "Construction Contract" is broadly defined as a contract for the carrying out of, arranging the carrying out of, or providing labour for the carrying out of "Construction Operations" – including agreements to do architectural, design, or surveying work; or to provide advice on building or engineering relating to "Construction Operations".
• In turn "Construction Operations" are also widely defined - and include construction, alteration, repair, maintenance, extension or demolition of works forming (or to form) part of the land; installing fittings forming part of the land; external or internal cleaning of buildings or structures; painting or decorating.

When could the Act apply to energy projects?

For energy projects (whether it's the supply and installation of plant, associated balance of plant and civils works, or ongoing operation and maintenance), careful thought must be given about whether "Construction Operations" are being undertaken.

The Act does set some activities which are not Construction Operations, like:

• S105(2)(a) – "drilling for, or extraction of, oil or natural gas"
• S105(2)(c) - "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 … Nuclear processing, power generation, or water or effluent treatment"
• S105(2)(d) - "manufacture or delivery to site of … materials, plant or machinery".

However, some activities on energy projects could fall outside these.

What the courts think

In the case of North Midland Construction plc v AE&E Lentjes UK Ltd [2009] EWHC 1371 (TCC), the judge decided that enabling and civil engineering works for power stations were not excluded from the Act even though the overall site was primarily for "power generation". A narrow interpretation of the exclusion in Section 105(2)(c)(i) was used, with the judge finding that the works in question were "general construction operations" and not the specific "assembly, installation or demolition of plant or machinery". 

This case confirmed the court's preference for a narrow interpretation of the exclusions under s105(2) of the Act, thereby opening up the option for parties undertaking similar enabling and civil works on power generation sites to make use of the statutory right to refer their dispute to adjudication (a fast-track dispute resolution process, which is available for construction contracts under the Act).

When considering the definition of S105(1)(b) as it pertains to "construction operations" the court also highlighted:

"construction, alteration, repair, maintenance, extension, demolition or dismantling of any works forming, or to form, part of the land, including (without prejudice to the foregoing) walls, roadworks, power-lines, electronic communications apparatus, aircraft runways, docks and harbours, railways, inland waterways, pipe-lines, reservoirs, water-mains, wells, sewers, industrial plant and installations for purposes of land drainage, coast protection or defence"

Other scenarios

It's worth noting also that there are other scenarios where this section of the Act could be interpreted to apply to elements of an energy project, which are untested in the courts. For example, whether a SCADA (Supervisory Control and Data Acquisition) system housed in a substation building could be covered by the S105(1)(b)?

It could potentially be 'electronic communication apparatus' under S105(1)(b), and the Act would apply if the installation or maintenance of its components (being the systems infrastructure such as cable and physical apparatus) constitute works that form part of the land. In considering whether it forms part of the land, the courts are likely to consider factors such as the object's degree of annexation (how its affixed), the intent of the parties for it to be a permanent structure, and the object's purpose. 

It's also worth noting that there are some Exclusion Orders that disapply the Act for certain agreements – like agreements under statute (such as s.38/106/273 agreements) and some finance agreements, and top tier PFI contracts. However, exclusions are interpreted narrowly by the courts.

Also the Act doesn't necessarily capture offshore work, but offshore projects also include onshore work to connect to the mainland and so, again, this needs to be carefully considered.

Why it matters

If the Act applies to a "Construction Contract" for an energy project, then the law implies certain terms into the contract. The parties, unaware that terms have been added into their agreement, may later find they are in breach these terms, as well as unaware of the rights and protections these terms give them.

In essence, these implied terms are about payment and disputes, including:

• A payment process that follows very specific steps (including notifications)
• A ban on certain payment clauses, and
• A right for parties to refer disputes to adjudication at any time.

These cannot be contracted out of.

What energy developers should consider next?

Review your projects to consider whether you have any "construction contracts". To avoid falling foul of the Act, parties must understand whether that Act applies, whether the contract complies with the Act's requirements and, if not, what terms the Act implies.

Where a contract relates to a mix of "construction operations" and other matters, the Act only applies to the extent it relates to "construction operations". These contracts are therefore "hybrid contracts", with the Act applying to only part of it. Hybrid contracts have been the subject of a number of court cases and there can be practical difficulties in complying with the Act if it only applies to part of the contract, so it is often prudent to ensure the whole contract complies.

However, each energy project is different, and should considered on its own characteristics.