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TCC considers the section 105(2) exclusions (again)

In my last post, when I considered the exclusions to “construction operations” set out in section 105(2) of the Construction Act 1996, I was looking at the supply-only exception and its proviso in section 105(2)(d). I concluded  that post by saying:

“I think that this case further reinforces the need to abolish the exclusions in section 105(2).”

When Matt posted the blog on LinkedIn, my views about the abolition of the supply-only exclusion prompted some lively debate, with some people in agreement and others pointing out some potential practical difficulties of abolishing it. However, my sense is that there is more consensus about abolishing the power generation exclusion in section 105(2)(c), following cases such as Severfield (UK) Ltd v Duro Felguera UK Ltd, where Coulson J (as he was then) was highly critical of it.

In this week’s post I want to discuss another section 105(2)(c) exclusion case, C Spencer v MW High Tech.

C Spencer Ltd v MW High Tech Projects UK Ltd

MW High Tech was the main contractor, engaged by Energy Works (Hull) Ltd, to design and construct a power plant processing fuel produced from commercial and industrial waste and municipal solid waste. C Spencer Ltd (CSL) was contracted to design and build the civil, structural and architectural works for the facility. MW also engaged other sub-contractors, including Engie Fabricom, who was contracted to construct a fluidised bed gasification power plant, and ended up in a dispute over whether its sub-contract works fell within section 105(2) because the “primary activity” of the site was power generation,  which Matt looked at.

CSL’s sub-contract was based on the IChemE Subcontract for Civil Engineering Works, The Brown Book. It included a couple of interesting features:

  • A single Construction Act-compliant payment mechanism (in clause 38). This meant that up to and including application for payment 31 (IA 31), and any subsequent payment notices and certificates, neither CSL nor MW distinguished between “construction operations” and “other operations”.
  • An adjudication provision (in clause 44) that applied to “any dispute or difference… under or in connection with the Subcontract” but “only to the extent (if any) required by [the Construction Act 1996]”. This meant that the parties could only adjudicate a dispute that related to “construction operations” rather than any dispute arising under or in connection with the contract. The judgment doesn’t explain why they chose to limit their rights in this way but, as this is fairly standard IChem E wording, perhaps they didn’t feel the need to change the contract’s standard wording. (The IChemE’s guidance notes suggest that if parties want adjudication to apply to all of their disputes “irrespective of the exemptions provided by the Act”, they should delete the proviso.)

CSL’s works included the assembly of plant and the erection of steelwork to provide support or access to plant and machinery. These works fell outside the ambit of “construction operations”. As both parties agreed the sub-contract works were carried out on a site where the primary activity would be power generation (in contrast to the dispute involving Engie), this was an important distinction when a dispute arose over IA 31, which CSL referred to adjudication.

On the back of clause 44, MW was able to successfully challenge the adjudicator’s jurisdiction in relation to IA 31 and the adjudication claim was withdrawn.

To overcome the problem of how its claim was framed, for the first time, CSL’s next interim application (IA 32) distinguished between “construction operations” and “other operations”. However, MW’s payment notice did not. That gave rise to Part 8 declaratory relief proceedings with CSL asking the court to decide whether valid notices (for the purposes of section 110A and section 111) must identify separately the sum due in respect of “construction operations”.

Before O’Farrell J

The matter came before O’Farrell J in the TCC and she held that MW’s payment notices did not need to distinguish, as CSL argued. However, she also held that, on the facts, it was necessary for CSL to distinguish between the sums claimed for “construction operations” and the sums claimed for “other operations” in its interim applications because it wanted to limit its claim in adjudication to the notified sum payable under section 111. She acknowledged that her approach was a “pragmatic solution to the illogical and uncommercial impact of section 104(5)”, and that each payment notice may have to be construed against the relevant contractual and statutory background.

O’Farrell J set out some very sound reasoning as to why, in a hybrid contract, a payment notice that does not separately identify the sums due in respect of “construction operations” under the Construction Act 1996 is still capable of constituting a valid notice for the purposes of section 110 and section 111. As a matter of policy, it would create an enormous administrative burden with possible significant implications for other similar projects if the judge had reached the opposite conclusion.

Limiting your right to adjudicate

However, I confess that there is one feature of this case which, in my view, could arguably have led to a different ultimate finding, and that arises out of the adjudication provisions in clause 44. As I mention above, although clause 44 includes an entitlement for either party to refer a dispute to adjudication, their right is limited to disputes in relation to works that are “construction operations”.

It seems to me that, if that is the case, then surely MW’s payment notice and/or pay less notice should separately identify the sums due in respect of “construction operations”, otherwise, how is CSL going to understand what sum MW considered was due to it, and why.

Conceptually, would it be possible to commence an adjudication for payment of the “construction operations” element of an application for payment, whether on a “smash and grab” or true value basis, in circumstances where CSL was unable to identify MW’s valuation of that element? If not, is this a fetter on the right to adjudicate?

O’Farrell J did not address the point directly, but did state at paragraph 61 that:

“… it is necessary for CSL to distinguish between the sums claimed for construction operations and sums claimed for other works because it seeks to limit its claim to the notified sum payable pursuant to section 111 of the Act. However, it is open to MW to defend that claim by relying on a payment notice, setting out the basis on which no sum is due in respect of any construction or non-construction operations.”

Indeed, I think that there’s a certain amount of irony in MW’s argument, given that in the adjudication concerning IA 31, it argued that the adjudicator did not have jurisdiction because the contractual adjudication provision was limited to disputes in respect of “construction operations” within the Construction Act 1996, and the dispute as framed by CSL did not “distinguish between the works and associated sums claimed falling within and outside the ambit of the Act”.

I understand that permission to appeal has been given, so perhaps this is one of the issues that will crop up.

Concluding thought

I’ll end this post as I started it, saying that I think this case provides further justification for the abolition of section 105(2) altogether.

3 thoughts on “TCC considers the section 105(2) exclusions (again)

  1. Jonathan, I agree we need to update and improve adjudication in the United Kingdom, removing the exclusions is certainly one of the needed improvements.

  2. Jonathan – great blog. This is something we discuss at length in the WFW team as we frequently advise on so called ‘hybrid’ contracts. It is an unwelcome and unnecessary complexity and we need clarity/certainty.

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