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Construction operations and “hybrid” contracts – an uncertain compromise

The Construction Act 1996 has recently come in for some stick. Not, in this particular case, because of its operation, but because of the exceptional circumstances in which it does not apply. This stick is revived, previously-wielded stick, but stick all the same.

In the latest Severfield decision of November 2017, Severfield (UK) Ltd v Duro Felguera UK Ltd (No. 2) [2017] EWHC 3066 (TCC), Coulson J reaffirmed his criticism of the “misconceived” basis on which Parliament justified the exclusion of certain industries from the provisions of the Construction Act and of the injustices which may flow from that exclusion. 

Coulson J referred back to his comments in Severfield (UK) Ltd v Duro Felguera UK Ltd [2015] EWHC 3352 (TCC) (at paragraphs 62 and 63):

“Parliament was aware of the difficulties that these exceptions would cause, but justified them on the grounds that (i) adjudication was seen as some form of ‘punishment’ for the construction industry from which (ii) the power generation and some other industries should be exempt, because ‘they had managed their affairs reasonably well in the past’.

I consider that both of these underlying assumptions were, and remain, misconceived.”

Having recently advised an EPC contractor carrying out works on a nuclear project of the risks associated with the impact of one of the exclusions (section 105(2)(c) – the nuclear exception), the practical effect of Coulson J’s criticism became very apparent.

“Construction Operations” and the exceptions to the Act

The Construction Act applies to all “construction contracts”, a term which is widely defined by the Act such that all design and construction contracts, including professional appointments, are likely to be captured as long as they relate to “construction operations”.

The Construction Act defines the range of “construction operations” broadly, in order that the advantages and protections it offers to the supply chain are widely available across the construction industry. However, certain industries within the construction and engineering sector were successful in persuading the government to exclude specific categories of works from the ambit of the Act when it was enacted almost 20 years ago.

The exceptions are limited to specific operations within specific fields. These limitations are interpreted narrowly so as to limit the extent to which parties are deprived of the Act’s protections.

Excluded works include, among other things, the 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 on a site where the primary activity is nuclear processing, power generation, or water or effluent treatment (section 105(2)(c)(i)).

Accordingly, some works under an EPC contract on a nuclear project, for example, are likely to qualify as “construction operations”, while others will be excluded.

The risks associated with “hybrid” contracts

Where contracts cover both “construction operations” and other excluded works (“hybrid contracts”), the provisions of the Construction Act apply only insofar as they relate to the “construction operations”.

The difficulties associated with hybrid contracts have been the subject of dispute and numerous court decisions. In line with the intention of the Act set out in section 104(5), the courts have taken the approach of splitting the payment and dispute resolution mechanisms into two parts (one for the “construction operations” and another for those works excluded from the operation of the Act). This approach is taken even in circumstances where it is clear that the parties were unaware of the distinction under the Construction Act at the time they entered into the contract, as was the case in the earlier decision of Severfield (UK) Ltd v Duro Felguera UK Ltd [2015] EWHC 3352 (TCC).

What next? – government consultation

So, should we have these exceptions? It seems clear from the recent Severfield decision that Coulson J thinks not. While the rough and ready nature of adjudication means that inevitably some parties have bad experiences, over the last 20 years adjudication has been accepted across the industry and is generally perceived as beneficial and a successful form of dispute resolution. Coulson J in Severfield (UK) Ltd v Duro Felguera UK Ltd [2015] EWHC 3352 (TCC) (at paragraph 63) refers to it as being regarded as a “blessing”, which needs to be conferred on all the industries that are currently exempt.

The government has recently undertaken a consultation on the 2011 changes to the Construction Act. There were no direct references in the consultation paper as to what comprises “construction operations” or the ongoing suitability of the exceptions to the Act. However, this forum does provide an opportunity to address a problematic area, which was justified on outdated assumptions.

Carillion’s recent demise and the impact on its supply chain will only increase calls for the wider application of the Act’s protections (insolvency was an issue in the Severfield case). However, those calls may be too focussed on other important issues, retention being a prime example, to have much impact in bringing the problems caused by the exceptions and hybrid contracts onto the government’s radar.

For now, parties need to consider whether it is a good idea to operate multiple regimes (Construction Act compliant and variations of non-Construction Act compliant) on a single project. There are real benefits, in terms of procedures and managing multi-party disputes, to be found in applying a project wide approach. This can readily be achieved by simply including Construction Act compliant provisions, which will apply to all disputes and not only those relating to “construction operations”. In other words, a contractual rather than a statutory procedure. Taking this easy step can help the parties avoid the significant problems to which a split regime, intentionally or otherwise, can give rise.

Berwin Leighton Paisner LLP Katy Wall

One thought on “Construction operations and “hybrid” contracts – an uncertain compromise

  1. This particular case, because of its operation, but because of the exceptional circumstances in which it does not apply. It is back-to-back the project company’s obligations

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