Hybrid contracts and civil engineering works
Hayley Swanson, Associate, CMS Cameron McKenna Nabarro Olswang LLP
INSPIRED by a recent Technology and Construction Court (TCC) decision concerning disputes arising from a hybrid contract, where part fell within the ambit of the Construction Act and part fell outside, this article considers the civil engineering aspects of hybrid contracts, case law on the impact of ‘getting it wrong’ and practical tips for managing those contracts.
Construction contracts
The key to whether a contract falls within the remit of the act is that it is a construction contract, meaning it concerns the carrying out of ‘construction operations’. Contracts which fall under the Housing Grants, Construction and Regeneration Act 1996, as amended by the Local Democracy, Economic Development and Construction Act 2009 are subject to the rules, and protections, of the act.
That includes the right to have certain minimum payment terms applied to the contract, and the right to adjudicate disputes. Where contracts do not comply with the requirements of the act, the scheme for construction contracts kicks in to impose compliant terms.
The key to whether a contract falls within the remit of the act is that it is a construction contract, meaning it concerns the carrying out of ‘construction operations’. What constitutes construction operations covers a wide range of activities as defined in the act and limited only by a narrowly interpreted set of exemptions (‘ exempted works’ ).
These exemptions include:
“... the assembly, installation or demolition of plant or machinery and/or access for same, on a site where the primary activity is nuclear processing, power generation, or water or effluent treatment... ”
Hybrid contracts
While most traditional building and infrastructure projects will constitute constructions operations and so fall within the remit of the act, projects such as windfarms or energy from waste plants may include a mixture of construction operations and exempted works. In such contracts, unless otherwise specified, the act applies only to the parts of the contract relating to construction operations.
The two key issues which arise from hybrid contracts are (1) the potential for there to be two payment regimes under one contract and (2) the extent of any right to adjudicate.
The court’s approach
The courts have considered several cases involving hybrid contracts in recent years. Crystal Electronics Ltd v Digital Mobile Spectrum Ltd concerned a dispute as to whether Crystal’s works were construction operations and therefore whether an adjudicator had jurisdiction to deal with a payment dispute.
While most traditional building and infrastructure projects will constitute constructions operations and so fall within the remit of the act, projects such as windfarms or energy from waste plants may include a mixture of construction operations and exempted works.Crystal had successfully adjudicated two smash and grab adjudications where the adjudicator had ordered payment to be made and sought to enforce those orders. Crystal’s work involved resolving interference to digital TV reception caused by high-speed mobile broadband. This required it to take signal readings and work backwards through the TV system to identify where the issue was. The work carried out included re-tuning the TV, installing filter boxes, changing faceplates, running new cables and/or replacing aerials.
DMSL argued that none of the work constituted construction operations and, as a result, that the contract did not provide a right to adjudicate. If that was accepted, the adjudicator would have had no jurisdiction, and therefore the decisions should not be enforced.
The court acknowledged that certain elements of the work such as the installation of faceplates, could be construction operations. However, the court found that the works, although relating to electronic telecommunications systems, did not form part of the land as they related to easily removable or replaceable equipment which was not integrated into the buildings. Therefore they were not considered to be construction operations. It further confirmed that as the adjudication claims included the exempted works, and these could not be the subject of adjudication under the act, the adjudication decisions could not be enforced. DMSL therefore successfully resisted enforcement of the adjudication awards.
In a previous case, Severfield (UK) v Duro Felguera UK, Duro Felguera had engaged Severfield to design, supply and erect steel structures as part of the wider construction of two power generation plants. Parts of the works were exempted as they related to power generation such as steel trusses supporting plant such as pipework, while works such as the fabrication of steel constituted construction operations.
The contract payment provisions were not compliant with the act. This meant that the scheme’s statutory provisions were implied into the contract in respect of the elements of the work which were construction operations with the contract terms applying to the exempted parts.
The two key issues which arise from hybrid contracts are (1) the potential for there to be two payment regimes under one contract and (2) the extent of any right to adjudicate.
This dual regime caused difficulties when Severfield made a payment application covering both work which fell within the description of construction operations and exempted works. Duro failed to issue a timely payment or pay less notice in respect of the parts of the works which were construction operations. In the absence of those notices, Severfield adjudicated for payment of the sum said to relate to the construction operations. While Severfield was successful in obtaining an adjudication award, it was unable to enforce it as the court considered the adjudicator had exceeded their jurisdiction by also considering and deciding on exempted works which did not fall within the adjudication regime of the act.
In a third example, C Spencer Ltd v MW High Tech Projects UK Ltd which went to the appeal court, CSL was subcontracted by MW to design and construct the civil, structural, and architectural works for the construction of a waste to energy plant. In contrast to the Severfield case, this hybrid contract contained a single payment mechanism applying to all works, and that regime complied with the act.
The subcontract required the issue of payment requests, payment certificates and, importantly a pay less notice if MW intended to withhold any part of the sum requested. It drew no distinction between exempted works and construction operations. Accordingly, these notices usually set out a single sum covering both exempted works and construction operations. This continued until CSL attempted to refer an unpaid application to adjudication. MW contended that the contract’s adjudication provisions were limited to construction operations.
When entering a contract which may be a hybrid, parties may, and would be sensible to, contract in to the act.CSL then issued a payment application splitting the sums between excluded works and construction operations. MW’s payment notice in response did not split the sums. CSL raised court proceedings for payment of that unpaid payment application on the basis that MW’s notice was invalid because it did not distinguish between the construction operations and exempted works. CSL was unsuccessful and appealed, again unsuccessfully.
The court considered that the parties had contracted to have one, act-compliant, payment regime applying to all the works, even though this was not necessary for the exempted works. That was a perfectly valid thing for the parties to have done. While it is not possible to contract out of the act, it is possible to contract into it. Therefore, MW’s notices did not have to differentiate between construction operations and exempted works to be valid as all were operated under a single payment regime.
Practical tips for entering and managing hybrid contracts
When entering a contract which may be a hybrid, parties may, and would be sensible to, contract in to the act. This can be achieved by replicating the act/scheme’s payment mechanisms and including an express, act-compliant contractual entitlement to adjudication. Contracting in can help avoid the issues seen in the case law where parties secured an adjudication award that was later determined to be unenforceable or ended up having to operate two different payment regimes for the work.
Most UK standard form contracts, such as NEC’s W2 provision, already have actcompliant terms. When using international forms such as FIDIC, these are likely to require adaptions to comply with the act.
Hayley Swanson, Associate, CMS Cameron McKenna Nabarro Olswang LLP
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