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Let’s put section 105(2) of the Construction Act 1996 into Room 101!

We haven’t seen an adjudication enforcement judgment from Ramsey J in quite a while, so it was good to read Laker v Jacobs recently. I think it is quite an interesting case as it touches upon lots of “common” enforcement issues (such as jurisdictional challenges and an adjudicator’s use of the slip rule). However, it is the circumstances surrounding affirmation (referred to as approbation and reprobation in the judgment) and the court’s findings on the section 105(2)(c) exception that I think are really worth talking about.

Laker v Jacobs

Tullis Russell makes paper from a large site at Markinch in Scotland. According to its website, it has been doing so since 1809. The site has its own power plant and, back in 2008, agreement was reached with RWE Npower Renewables Ltd for a new biomass plant to be built on the site. Not only would this replace the site’s existing (and ageing) coal and gas plant, it would also provide some “green” electricity that RWE could export to Scotland’s national grid.

RWE entered into a main contract with Jacobs E&C Ltd for the biomass plant and, in turn, Jacobs entered into a sub-contract with Laker Vent Engineering Ltd for the pipe-work at the plant.

Things obviously did not go smoothly and disputes arose between Laker and Jacobs over Laker’s claim for an extension of time and for prolongation costs, and also the issue of the taking over certificate. Towards the end of 2013, Laker referred three separate disputes to adjudication and the same chap was appointed in each one. The parties agreed that the adjudicator should deal with all three adjudications together, issuing his decisions on 7 January 2014. The adjudicator awarded an amount in excess of £808,000 plus VAT to Laker. When Jacobs did not pay, Laker started enforcement proceedings. In response, Jacobs applied for declaratory relief relating to the relationship between the extensions of time and the sub-contract’s mechanism for taking-over. Laker sought to have this CPR Part 8 application stayed to arbitration under section 9 of the Arbitration Act 1996.

So far, this is all rather familiar.

Affirmation of the decisions

Most responding parties reserve their jurisdictional rights and Jacobs was no exception. Here the reservation in question was made in the letter sent to the adjudicator asking him to correct his first decision under the slip rule. Jacobs argued that merely by asking for the decision to be corrected, it was not electing to treat the decision as binding since it would not be taking any benefit in relation to the decision. Rather, the reservation was sufficient to allow it to challenge jurisdiction in later proceedings.

Laker disagreed, which is unsurprising. However, Ramsey J agreed with Jacobs and said that, although he reached his conclusion “with some hesitation”, a party can rely on a general jurisdictional reservation and apply under the slip rule or make payment.

I think the critical thing here is that if a reservation is made at the same time as a party requests a slip to be corrected (as Jacobs’ solicitor did), that party needs to be clear about exactly what rights it is seeking to reserve. Here Ramsey J suggested that the reservation did not extend beyond jurisdictional issues, therby precluding challenges on other grounds (see paragraph 98 of the judgment).

Section 105(2) exception

The sub-contract did not refer to adjudication, therefore the crux of this issue was whether the sub-contract was a construction contract, as defined by sections 104 and 105 of the Construction Act 1996. If it was, there was an implied term giving rise to a right to adjudicate under the Scheme for Construction Contracts 1998.

Section 105(2) deals with the exceptions to construction operations, including the:

“(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-

(i) nuclear processing, power generation or water or effluent treatment, or

(ii) …” (my emphasis)

Therefore, the real issue between the parties was the meaning of “site”. If it was:

  • Restricted to the area where the power station was based (as Jacobs argued), then the primary activity of the “site” would be power generation and the works would not be “construction operations” and the Act would not apply.
  • The whole site (as Laker argued), then the primary activity of the “site” would be paper production and the works would be “construction operations” and the Act would apply.

The same issue cropped up in ABB Zantingh Ltd v Zedal Building Services Ltd [2000] EWHC 40 (TCC), albeit in that case the power station was serving the Mirror Group printing business rather than a paper mill. There HHJ Bowsher QC found that the primary activity on the site was printing, not power generation.

Jacobs sought to distinguish ABB v Zedal on the basis that:

  • RWE owned the plant on land leased from Tullis Russell, whereas in ABB the generators were owned by the Mirror Group and were on the Mirror Group’s land.
  • RWE will export electricity to the national grid, whereas in ABB the power was generated soley for the Mirro Group’s use.

Given these distinguishing features, I think that Jacobs could have rightly considered its argument to be pretty strong, but Ramsey J disagreed. He held that, while part of the site was leased to RWE, the freehold remained in the ownership of Tullis Russell. In any event, he said that analysing the leases and other documents (which Laker and Jacobs probably would not have seen) complicated the issue of the definition of the site, rather:

“the matter has to be considered as one of overall impression rather than detailed examination of particular documents or obligations.”

With regard to the provision of power to the national grid, Ramsey J said that:

“the definition of the ‘site’ depends not on that consequence but on the location of the Plant. The Plant was located where it was because it was to provide a power and steam facility for the Tullis Russell paper mill.”

Time for Room 101?

While the issues that cropped up in this case might only arise in limited circumstances, it is a useful reminder of what courts will consider to be the “site” under section 105(2)(c). However, this case also raises bigger issues, namely the question of why we need section 105(2) at all.

It was the subject of much discussion in Parliament back in 1996, as summarised by Ramsey J in North Midland Construction plc v A E & E Lentjes UK Ltd. In particular, the point was made that process engineering and power generation is “totally different from construction” and involves heavy plant and machinery.

While that may be the case, there is no reason why adjudication cannot be used successfully in such industries, and there is evidence that some users include contractual adjudication in contracts. For example, I have acted as adjudicator in contractual adjudications involving power stations. Interestingly, the Irish have not sought to exclude such operations in the Construction Contracts Act 2013 (although they have limited their Act to payment disputes).

The same can be said of supply only contracts. What is the point in excluding them? I think that the exclusions are now outdated and simply result in costly cases like Laker v Jacobs. In my view,  section 105(2) should be consigned to George Orwell’s fate worse than death, Room 101.

One thought on “Let’s put section 105(2) of the Construction Act 1996 into Room 101!

  1. Jonathan – an interesting blog, but I have to disagree regarding doing away with s.105(2). I act for a number of clients in the chemicals industry who remain opposed to the introduction of statutory adjudication to the construction of their facilities. I tend to agree with them that a 28-day dispute resolution procedure is simply not suitable to deal with matters concerning very complex chemical processing plants.

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