In 1998, the Housing Grants, Construction and Regeneration Act came into force (Construction Act) and fundamentally altered the nature of contracts in the construction industry through the introduction of statutory implied terms regarding payment and adjudication.
These terms were introduced to address concerns that unfair payment practices were contributing to a high level of insolvencies in the construction sector. Those practices included payment terms which made subcontractors' payment dependent upon the main contractor receiving payment, provisions which prevented payment of amounts 'in dispute' but then postponed the resolution of disputes to arbitration, and simple non-payment on the basis of spurious disputes.
The statutory framework was introduced to apply to "construction contracts" only (as defined under the Construction Act). This meant that certain industries were 'protected' from the statutory implied terms. At the time of the Construction Act, many were wary of the introduction of the statutory right to adjudicate. Indeed, the introduction of adjudication was viewed by some as a form of "punishment" to which certain industries, such as the power generation industry, should not be subjected.
However, those in construction have now come to see adjudication as a relatively familiar, cost effective and speedy process, and one which provides parties a degree of clarity and certainty. Of course, it is not a perfect process but it does what it says on the tin.
The trouble is, many are now so used to adjudication and the statutory payment regime that some do not appreciate that not all works under their contract may come under the Construction Act. As the Honourable Mr Justice Coulson stated, "the inevitable result is a muddle".
What is a construction contract?
A construction contract is defined by the Construction Act as a contract "for the carrying out of construction operations" and it is in the definition of "construction operations" where confusion can arise, as certain activities of a number of key industries are excluded.
In short, the following are excluded:
- drilling for, or the extraction of, oil and natural gas
- extraction, tunnelling or boring of minerals
- assembly, installation or demolition of plant or machinery, or the erection or demolition of steelwork for the purposes of supporting or providing access to plant or machinery (this is where the primary activity on site is nuclear processing, power generation or the production of chemicals, pharmaceuticals, oil, gas, steel, food or drink)
- manufacture or delivery to site of certain components, materials, plant or machinery
- making, installing and repairing of artistic works (such as sculptures).
To see the full definitions of "construction contract", "construction operations" and the exclusions under Sections 104 and 105 of the Construction Act, please click here.
Why does this matter?
Parties may incorrectly assume that their works constitute construction operations and therefore that the statutory provisions apply to their contract, when they do not.
The practical consequence of this issue is that, under a contract with no relevant express provisions, parts of the works may be deemed to fall within the scope of the Construction Act and parts may not. This creates what is known as a hybrid contract.
This will impact a party's ability to rely on the implied provisions regarding payment and a party's right to adjudication.
The difficulties of having a hybrid contract were illustrated in the case of Severfield (UK) Limited (Contractor) v Duro Felguera UK Limited (Employer) where the High Court ended up splitting the payment and dispute resolution mechanisms in the contract into two separate parts, one part for the works covered by the Construction Act and another for the works that fell within an exclusion in the Construction Act.
The contract concerned the design, fabrication and installation of steelworks at two new power generating plants. A dispute arose regarding the amount of an interim payment and the Contractor referred the dispute to adjudication. The Employer challenged the jurisdiction of the adjudicator by contending that some of the works for which the Contractor was seeking payment through adjudication were works which were excluded from the definition of construction operations under the Construction Act. Therefore, the statutory adjudication regime did not apply.
The Contractor accepted that some of the works were excluded and adjusted its claim by dividing the contract works into "fabrication and delivery", which were not excluded, and "erection only," which were largely excluded. The adjudicator eventually decided in the Contractor's favour, awarding a sum of over £3 million. However, the Employer refused to pay and when the Contractor came to enforce the whole of the adjudicator's decision through summary judgement, the Employer once again objected on the basis that some of the works to which the adjudicator's decision applied were excluded from the definition of construction operations in the Construction Act. The Employer was successful, which left the Contractor unable to recover the adjudicator's award.
When the Contractor unsuccessfully applied again to court to obtain judgment in its favour as to part of the adjudicator's award, the Honourable Mr Justice Coulson noted that, as regards the fact that some of the works under the contract comprised construction operations and some did not, it was "plain that the parties were unaware of this distinction at the time they entered into the contract."
What is the solution?
Firstly, at the outset of the project and contract negotiation process, the parties and their representatives must consider whether the Construction Act applies as against each element of the works. It is important to undertake this detailed analysis, rather than simply considering the project as a whole.
Where it is clear that the works to be undertaken are a mixture of construction operations and excluded works, parties:
- must ensure that the payment and any adjudication provisions comply with the requirements of the Construction Act (in relation to the works which are "construction operations" under the Construction Act)
- should consider whether to expressly include the rights referred to in the Construction Act, if the parties desire such rights to apply across the whole of the works (in relation to the works which would otherwise be excluded under the Construction Act).
Had the parties in Severfield v Duro (above) expressly stated in their contract that the payment and adjudication regimes contained within the Construction Act were to apply even to the excluded works, the Contractor could have avoided the Employer's repeated and eventually successful challenges as to the jurisdiction of the adjudicator and consequently the enforceability of the adjudicator's decision.
Entire works do not come within the Construction Act
Where the entire works are clearly excluded by the Construction Act, parties should consider whether they want to expressly include a right to adjudicate under the contract and / or the payment provisions under the Construction Act even to the excluded works, as the statutory regime will not apply to those works unless the contract expressly states that it does.
Conversely, if you are the recipient of a Notice of Adjudication under the Construction Act or your contracting party is seeking to otherwise rely on the statutory provisions (such as suspension of the works due to non-payment), then check whether your contract comes within the definition of "construction operations" under the Construction Act. If it does not, this may enable you to challenge that party.
If you want a right to refer a dispute to adjudication
As the Honourable Mr Justice Coulson noted in Severfield v Duro, whilst historically adjudication may have been viewed as a "punishment", these days it has become somewhat of "a blessing", providing parties with a cost effective vehicle for clarity and certainty in the resolution of disputes.
Put simply, if you don't know whether your entire works come within the Construction Act and you want to have the right to refer a dispute to adjudication, you must state so expressly in your contract.