REUTERS | Toru Hanai

Construction contracts and construction operations: confusion over exclusion?

Cases relating to the definition of “construction operations” under section 105 of the Construction Act 1996 often concern adjudication, and not payment. However, whether a contract is a “construction contract” for the purposes of the Construction Act 1996 affects the parties’ payment obligations as well as their right to adjudicate.

Cleveland Bridge v Whessoe: part construction operations, part not

In Cleveland Bridge (UK) Limited v Whessoe-Volker Stevin Joint Venture, Ramsey J had to determine whether particular sub-contract works at a liquified natural gas terminal at Milford Haven were construction operations. He needed to consider both the definition of construction operations in section 105(1) and those items excluded from that definition by section 105(2) of the Construction Act 1996.

In the end (see paragraph 61 of the judgment), the court held that most of the works were construction operations, but some were not:

“…the only operation which is excluded from being a construction operation by section 105(2)(c)(ii) is the erection of the steel work for the piperacks and pipebridges and not the prior activities of fabrication drawings, off-site fabrication or delivery to site of the fabricated steelwork.”

Even using Ramsey J’s test of looking at the works broadly and ignoring grey areas (as set out in North Midlands Construction v AE & E Lentjes), part of the works were subject to the Act and part were not. This situation is likely to occur on many projects. Ironically, this is particularly the case since it is now confirmed that the exceptions in section 105(2) are to be construed narrowly.

Other exclusions from construction operations might have applied

Section 105(2)(d) might have made a difference. After all, it refers to the “manufacture or delivery to site of… building or engineering components or equipment”. However, critically, that exception to the definition of construction operations did not apply because the sub-contract in question required the sub-contractor to install the works on-site (but on a site where the primary activity was the “production, transmission, processing or bulk storage… of… gas”).

Further, the phrase “components or equipment” is itself to be construed narrowly (Ramsey J discusses the meaning of “components” in North Midlands Construction) so it is unlikely that the structural steel itself would fall within this wording.

An absurd anomaly?

So, the Construction Act 1996 leaves us with a potentially absurd anomaly, which not only affects the scope of what disputes may be referred to adjudication, but also affects the payment provisions of a contract (that may be a “construction contract”).

The Cleveland Bridge judgment does not address payment, but if the parties to this sub-contract did not want the Scheme for Construction Contract 1998 to apply to (at least some of) their payment obligations, they would have needed to draft payment clauses for the operations that were “construction operations”, that complied with the Construction Act 1996.

According to the judgment, one consequence of the Construction Act 1996 is that the sub-contractor should be paid for off-site manufacture, for fabrication drawings, and for delivery to site under payment rules that are Construction Act 1996-compliant, but then could be paid for on-site work under commercial payment rules of the parties’ choosing. In practice, this will mean that the contractor or sub-contractor can only protect its cash flow to a limited degree.

Attempts to enforce any cash flow protection (whether by adjudication or directly by summary judgment, for example on an architect’s certificate) will be further complicated by the need to ensure that, if there is doubt as to the scope of the jurisdiction, the parties will have to ask the tribunal to determine various alternative forms of the dispute, as Cleveland Bridge sought to do in its Referral Notice. However, parties will be at the mercy of an adjudicator who does not provide a decision in such a severable, enforceable form.

Lobbying and compromise have left a mess

The definition and exclusions relating to construction operations was a result of compromise and lobbying. 14 years after the Construction Act 1996 became law, we are still seeing the discrepancies that this throws up.

Even in the industries that lobbied for exceptions, will more and more parties follow the payment and adjudication rules of the Construction Act 1996 to avoid this sort of argument altogether? Or will employers and main contractors on process industry sites become astute at identifying where they can impose onerous pre-Act payment clauses on a wider scale?

Lucy Garrett was junior counsel for Cleveland Bridge (UK) Ltd in Cleveland Bridge v Whessoe.

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