Construction Act: In out – shake it all about

As the debate rumbles on over the proposed Hinkley C power station project, it is worth reflecting that, if the project goes ahead, many of the resulting construction contracts will not be governed by the Construction Act. They will fall within the “power/process plant exemption” set out in section 105 of the act. Any party that can bring their contract within the exemption – and generally it is the paying party that benefits – need not worry about such things as payment notices or adjudication.

What contracts are exempt? First, the “primary activity” on the site must fall within one of the following categories: nuclear processing, power generation, water/effluent treatment; or the production or processing of chemicals, pharmaceuticals, oil, gas, steel, food or drink. Note that it is not just power stations that are covered.

Second, the contract must be for the assembly, installation or demolition of plant or machinery (or associated steelwork). That second test was aimed at contracts for the supply and installation of large items of kit such as conveyors, burners and turbines. Specialists who carried out that sort of work were thought not to need the Construction Act’s protection. Meanwhile traditional building and engineering contracts were covered by the act, as at any other site.

It was felt that certain industries did not need an adjudication regime because they were capable of regulating themselves. It does not seem to be the case now

It is quite possible to have a situation under which the main contract is largely within the Construction Act, but a subcontract (for example, for the supply and installation of a turbine) is outside the act. That can be a headache for a main contractor who is trying to make things “back to back” so far as possible.

But it gets worse. It is also quite clear that an individual contract can be partly in and partly out of the act (a “hybrid” contract, as it is called). So if, for example, an EPC (engineer-procure-construct) contractor at a power station takes on building and civil engineering works, together with an obligation to install a large item such as a conveyor (which it intends to subcontract), it could adjudicate any claims so far as they relate to the building elements, but not so far as they relate to the conveyor. The potential for mayhem is obvious.

Looking at this unhappy situation, one may ask: what was the purpose of the exemption in the first place? The answer is that in 1996 when the Construction Act was passed, it was felt that certain industries did not need a payment and adjudication regime because they were capable of regulating themselves. As one speaker in the House of Lords put it, the power and process industries “do not suffer from the litigation and claims-oriented attitude which beset the building and civil engineering industries”.

That may have been true in 1996, but it does not seem to be the case now – as indicated by the number of reported cases involving process plants. A recent example is Severfield (UK) Ltd vs Duro Felguera UK Ltd, heard in the Technology and Construction Court at the end of last year. Severfield was engaged by the contractor, Duro Felguera, to supply and erect steel structures. It was accepted by both parties in court that the contract was a “hybrid contract” of the type described above.

A contractor could adjudicate claims so far as they relate to the building elements, but not so far as they relate to the conveyor. Potential for mayhem is obvious

The court found that this inevitably led to two separate payment and dispute resolution regimes, something that the parties presumably did not intend. The first regime was the one that was drafted, but that only covered the works relating to the plant and machinery. The second regime was imposed by the Construction Act, and covered the other works. As the judge said:

“If the contract is a hybrid contract, because it includes for both included and excluded operations, the inevitable result is a muddle.”

The judge noted that two reasons had been given in 1996 for excluding the power and process industries. The first was that adjudication was seen as “punishment” which those industries did not deserve to have inflicted on them. The second was that, so it was said, those industries had managed their own affairs well in the past. Both assumptions, said the judge, were misconceived. In particular, adjudication had turned out to be a blessing, not a punishment, for the construction industry.

The idea of having contracts that are half in and half out of the Construction Act is an absurdity. If and when parliament reviews the act, as it last did in 2011, this issue will surely be high on its list.

Ian Yule is construction partner at Weightmans LLP