Crazy mixed-up contracts

The case of Nottingham Community Housing Association Ltd vs Powerminster Ltd, commented on by Tony Bingham (28 July) raises a number of interesting questions about how “hybrid” facilities management contracts should be dealt with. These are contracts where some of the services to be performed come under the Construction Act, and some do not.

To recap, Nottingham entered into a contract with Powerminster for annual services and safety checks on gas appliances in Nottingham’s properties. Powerminster was also to provide a responsive repair and breakdown service. The appliances to be inspected, serviced and maintained included gas central heating systems, fires and cookers.

A number of invoices sent to Nottingham by Powerminster remained unpaid so Powerminster gave notice of adjudication under the act. Nottingham argued that the contract was not a “construction contract” for the purposes of the act, as the repair and maintenance of such gas appliances did not amount to construction operations as defined in the act. As a result, Nottingham argued, the adjudicator had no jurisdiction to deal with the dispute. This question was referred to Mr Justice Dyson, who concluded that the repair and maintenance of heating systems was within the act’s definition of construction operations. An adjudicator would therefore have jurisdiction to consider the disputes over the unpaid invoices.

Although the conclusion that repair and maintenance of heating systems is within the ambit of the act is not surprising, it is not clear if the mere servicing of gas appliances or the undertaking of safety checks in relation to them would be covered by the act. The case report does not make it clear whether the disputed invoices were for repair and maintenance work incurred as part of the responsive service or whether they related to the normal annual servicing and safety inspections.

At any rate, Nottingham conceded that the contract was for “maintenance and repair” but argued unsuccessfully that services performed in relation to the gas appliances were not construction operations. There is obviously a fine line between servicing and inspecting an appliance and maintaining it. Would the mere cleaning of a gas appliance as part of a service or safety inspection amount to maintenance? If not, Nottingham and Powerminster could have found that their contract was a hybrid, where some of the services provided by Powerminster were subject to the act and others were not.

Hybrid FM contracts are not uncommon. Where total FM services are provided, many services will fall outside the definition of construction operations and so the act will not apply to them. In such circumstances, an adjudicator’s jurisdiction might not extend to all disputes under a contract. This was illustrated in Homer Burgess Ltd vs Chirex (Annan) Ltd (November 1999), where the Scottish Court of Session found that an adjudicator had exceeded his jurisdiction. He had decided disputes under a contract that primarily related to services that were not construction operations pursuant to a construction contract under the act. However, the court and the parties acknowledged that some of the works undertaken by Chirex did fall within the definitions and that, as far as those works were concerned, the adjudicator did have jurisdiction.

There are obvious problems in having two dispute-resolution mechanisms for one contract. Parties could find themselves able to resolve certain elements of a dispute rapidly by way of adjudication, while other elements of the same dispute may need to be referred to the courts or arbitration over a considerably longer period.

In addition, following VHE Construction plc vs RBSTB Trust Company Ltd (January 2000), it would seem clear that a losing party in an adjudication cannot set off against an adjudicator’s award any other losses it may have incurred.

So, if parts of the services are subject to the act and others are not, the client may find it cannot do what it thought it could under the contract. For example, it may have a performance point system or service level agreement to deal with defective work or underperformance, but be unable to use it to make set-offs, abatements or deductions if the services turn out to be subject to the act. Additional difficulties can also be envisaged: for example, a contractor facing unfair non-payment having the right to suspend some kinds of services and not others.

Given the confusions that could arise, it would seem sensible for those drafting FM contracts to follow the lead of the Chartered Institute of Building’s Standard Form of Facilities Management Contract and the new PACE GC/Works/10 Standard Form of Facilities Management Contract. In these documents, all services under a contract are subject to fair payment and adjudication provisions compliant with the act, irrespective of whether or not such services would ordinarily be construction operations performed under a construction contract.