Recent cases consider “construction contract” exclusions under the Construction Act

In this blog post we look at recent cases which highlight the issues caused by the list of exclusions under the Construction Act.

A “construction contract”, to which the provisions of the Housing Grants, Construction and Regeneration Act 1996 (Construction Act) apply in relation to payment, adjudication and suspension, is defined in section 104 of the Act as an agreement with a person for the carrying out of construction operations (whether by one of the parties or by a sub-contractor) or providing labour for such construction operations.

Under section 104(5) of the Construction Act, where a contract relates in part to construction operations and in part to unrelated matters, the Act will apply only to those parts of the contract that relate to construction operations.

“Construction operations” are broadly defined under s105(1) and include preparatory work.

Section 105(2) of the Act sets out types of works that are excluded from the definition of "construction operations" such as drilling for oil or natural gas, extraction of minerals and some works supporting nuclear processing, power generation or water treatment.

The excluded works have created anomalies and been interpreted narrowly by the courts in the past. For example, in North Midland Construction plc v A E & E Lentjes UK Ltd [2009] EWHC 1371 (TCC), even though works were performed at a site where the primary activity was power generation, the court held the sub-contractor’s enabling and civil works were not excluded works under the Act.

In the recent Technology and Construction Court (TCC) case of Equitix ESI CHP (Wrexham) Ltd v Bester Generacion UK Ltd [2018] EWHC 177, the court held that it was wrong in principle to say that the preparatory works, such as the preparation of bonds and a business plan, were excluded operations. These were often preparatory steps prior to a major construction contract and therefore caught by the definition of “construction operations” under section 105(1). The fact that they were not physical site works was irrelevant. It would make a nonsense of the Construction Act if every preparatory or ancillary operation not expressly identified in section 105(1) became an excluded operation.

In Severfield (UK) Ltd v Duro Felguera UK Ltd (No. 2) [2017] EWHC 3066 (TCC), the court noted that the parties' sub-contract was a hybrid contract because it covered both included and excluded operations. The sub-contractor had commenced adjudication proceedings against the contractor, claiming payment of its final account but some of the sub-contractor's works fell within the meaning of "construction operations” and some fell within the exceptions because they related to power generation. However, the parties had agreed a payment regime that was not in accordance with Construction Act. Although the adjudicator decided in the sub-contractor's favour, the enforcement proceedings following the contractor’s subsequent liquidation were unsuccessful because of the jurisdictional issues introduced by the exceptions. The parties had ended up with two different payment regimes and the court could not imply all of the Construction Act’s provisions to the whole subcontract. The court commented that the exceptions contained within section 105(2) of the Construction Act had been casually introduced by Parliament without any serious debate and under pressure from certain industries and had led to an injustice to the sub-contractor in this case.

A Government review is currently underway in relation to the provisions of the Construction Act, although its focus is meant to be the effectiveness of the 2011 changes to the Act and the list of excluded operations in the original Act was not amended in 2011. It may be that with the recent criticism of these excluded operations by the TCC and the anomalies and issues raised by them in past cases, section (105)2 of the Act might become the subject of some reconsideration.

This document (and any information accessed through links in this document) is provided for information purposes only and does not constitute legal advice. Professional legal advice should be obtained before taking or refraining from any action as a result of the contents of this document.