Think you have a construction contract? Well, think again.
26th April 2017
For chemical engineers working as contractors in the design and construction of a plant, your contract is key to ensuring that your rights are protected. However, the lines are often blurred when it comes to which activities are covered by the Construction Act and which aren't.
The Construction Act (also known as the Housing Grants, Construction and Regeneration Act) came into force in 1998. It fundamentally changed the nature of contracts in the construction industry, through the introduction of statutory implied terms regarding payment and rights to adjudication. These terms were introduced to address concerns that unfair payment practices were contributing to a high level of insolvencies in the construction sector.
What is a construction contract?
Now, if you are working on a new plant or structure, you should have a contract in place. Whether this is a construction contract as defined by the Construction Act (a contract for the carrying out of construction operations), depends upon the nature of works.
It’s in the definition of construction operations where confusion can arise as a number of activities within key industries are excluded.
What activities are excluded?
Drilling for, or the extraction of, oil and natural gas is explicitly excluded as a construction operation. Certain activities in relation to nuclear processing, power generation and the production of chemicals, pharmaceuticals, oil, gas or steel are also all excluded from the ambit of the Construction Act.
So what?
You might think that your work is a construction operation and is therefore covered by the Construction Act, but if it isn’t then you won't benefit from the statutory rights introduced by the Construction Act – including your right to adjudication if there are problems with your employer or your payments on a project.
This could be a huge issue if your contract has no ‘express provisions’ regarding adjudication or payment, especially where some of your work is considered to be construction operations, and some parts are not. In respect of the parts of the works that are not covered by the Construction Act, you would not be able to refer a dispute regarding those works to statutory adjudication. You would also not be able to rely on the payment provisions in the Construction Act to assist with any payment disputes.
When some of your work under a contract is covered by the Construction Act, and some isn’t, it’s called a hybrid contract.
What is the impact of having a hybrid contract?
Let’s take a real-life example. The case of Severfield (UK) Limited (Contractor) v Duro Felguera UK Limited (Employer) [1] concerned a contract for the design, supply and erection of steel structures at two new power generating plants, on a site in Manchester, UK. A dispute arose regarding the amount of an interim payment and the Contractor referred the dispute to adjudication
As we discussed above, certain activities in power generation are excluded from the Construction Act and it was determined that Severfield's contract was a hybrid contract. The contract did not contain any express provisions in relation to adjudication, so Duro Felguera challenged the Contractor's right to use the adjudication process to resolve a dispute by arguing that parts of the works fell outside of the scope of the Construction Act. Simply put, this meant Severfield had no right to refer the dispute to adjudication for those (excluded) parts.
Despite Duro Felguera's arguments, the adjudication proceeded and the Severfield was awarded the sum of over £3 million. However, the case was not over yet and Duro Felguera refused to pay, again stating that the adjudication was invalid.
After much legal wrangling in the High Court, Duro Felguera eventually won using the arguments described above and didn't have to pay any of the £3 million initially awarded by the adjudicator.
Eventually, the High Court ended up splitting the payment and dispute resolution provisions into two separate parts, one part for the works covered by the Construction Act and another for the works excluded in the Construction Act. The practical consequence of this was that some of the works to which the adjudicator's £3 million award applied were not able to be referred to adjudication in the first place and so the adjudicator never had the right to decide those aspects of the dispute.
The Honourable Mr Justice Coulson, who led proceedings, noted that it was clear both Severfield and Duro Felguera were unaware of the exclusions surrounding construction operations when they entered into the contract, and therefore were unaware that they had in fact entered into a hybrid contract.
If the two parties had expressly stated in their contract at the beginning that the payment and adjudication regimes contained within the Construction Act were to apply even to the excluded works, then the Contractor (Severfield) could have avoided the Employer's (Duro Felguera) repeated and eventually successful challenges as to whether the adjudicator had the right to decide the dispute and would have been entitled to the £3 million awarded by the adjudicator.
How can I protect myself?
Statutory adjudication was introduced to apply to construction contracts only (as defined under the Construction Act) and is often described as a ‘pay first, argue later’ mechanism. It’s seen as a relatively familiar, cost effective and speedy process, and one which provides parties a degree of clarity and certainty. The trouble is some do not appreciate that not all works under their contract may come under the Construction Act (like Severfield V Duro Felguera). As the Honourable Mr Justice Coulson [2] stated, "the inevitable result is a muddle".
To make sure you don’t get stung as a contractor, at the start of a project and contract negotiation process, you must consider whether the Construction Act applies to each element of the contracted works.
The devil is in the detail as they say. Make sure you do a 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, you have a hybrid contract. Therefore you:
- must ensure that the payment and any adjudication provisions comply with the requirements of the Construction Act (in relation to the works which are considered construction operations);
- should consider whether to expressly include the rights referred to in the Construction Act, if you desire such rights to apply across the whole of the works (in relation to the works which would otherwise be excluded as construction operations).
So remember...
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. This way, if there are any issues around payment, delay or disruption, or the final account, they can be escalated with the tried and tested dispute resolution mechanism of adjudication.
IChemE Forms of Contract
Our Forms of Contract are an internationally acclaimed series of model forms of agreement, developed to reflect best practice for project delivery in the process industries.
Drafted by a team of legal and industry professionals, they address the complex way in which the purchaser, contractor and subcontractor divide responsibility for creating new process plants and working on existing structures.
See the full Forms of Contract suite here.
This blog post was written in partnership with Bond Dickinson LLP.
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.
If you would like to know more about the Construction Act and construction contracts get in touch with the authors:
Emily Leonard, Associate (emily.leonard@bonddickinson.com)
Hannah Gardiner, Solicitor (hannah.gardiner@bonddickinson.com).
[1] [2015] EWHC 3352 (TCC)
[2] In Severfield (UK) Limited v Duro Felguera UK Limited [2015] EWHC 3352 (TCC)