UK: Construction Case Comment – Adjudicating When The Contract Works As A Whole Are Excluded Operations?

The Technology and Construction Court (TCC) has recently issued guidance on what activities are excluded from the statutory adjudication process under s.105(2) of the Housing Grants (Construction and Regeneration) Act 1996 as amended under the Local Democracy Economic Development and Construction Act 2009 (the "Construction Act") and on what basis a court may order a 'stay of execution' against a victorious SPV claimant.

Case summary (Equitix ESI CHP (Wrexham) Limited v Bester Generacion UK Limited)

This case concerned a project to design and build the Wrexham Biomass Fired Energy Generating Plant (the "Project"). The claimant was a special purpose vehicle ("SPV") created for the Project, whilst the defendant was the main contractor. The dispute was focused on the validity of the claimant's termination of the contract and the basis for claiming back substantial sums already paid to the defendant.

Progress on the Project was slow and the employer issued a notice of adjudication to obtain a declaration that the defendant was not entitled to an extension of time. The adjudicator agreed and so the claimant subsequently terminated the contract, stating to the defendant that it had opted not to continue with the Project.

Following the termination of the contract the claimant issued an interim account requiring the defendant to pay around £11.5m.

The dispute arose around whether the contract was validly terminated and the valuation of the interim account (£11.5m). The dispute was referred by the claimant to the same adjudicator as the initial adjudication (for the extension of time point) who decided the defendant was liable to pay approx. £9.8m to the claimant. Proceedings were subsequently brought by the claimant in the TCC, to enforce that second adjudication decision.

What is classed as a construction contract dispute?

The Construction Act applies to 'construction operations' and defines construction operations by listing a wide range of matters which constitute construction operations (as per s.105(1) of the Act) – for full details of what is included within the ambit of the Act, please click on the above link.

The Construction Act also excludes certain works from construction operations (s.105(2)). Excluded operations (under s.105(2)(c) of the Act) include:

"assembly, installation or demolition of plant, machinery, or erection or demolition of steelwork for the purposes of supporting or providing access to plant or machinery, on a site where the primary activity is:

(i) nuclear processing, power generation or water or effluent treatment..."

S.104(5) of the Construction Act also provides that if a contract relates to construction operations and other matters (construed as a "hybrid contract") the Act applies only so far as it relates to construction operations.

In this case the defendant's main argument was that s.105(2) of the Construction Act excluded the construction operations being carried out by the defendant contractor and that the payments made by the claimant to the defendant involved payments for excluded activities. In essence it resisted enforcement on the basis that the adjudicator did not have jurisdiction to determine the dispute.

The claimant argued that the payments were in fact made for activities permitted under s.105(1) of the Act (and not excluded by s.105(2)(c) of the Act). On the latter point, it cited that the ground in question had not been excavated (in preparation for the contracted works to be commenced and then did not fall within the assembly, installation or demolition exclusion). Mr Justice Coulson agreed with this assessment and confirmed that the works carried out by the defendant until the point of termination fell within the scope of s.105(1)(e) of the Act and so no jurisdiction issue arose in respect of the adjudication. Preparation works are common in major construction projects and in this case, because no plant had ever been brought on-site by the defendant (as per s.105(2)(c)) the dispute did not concern excluded activities under the Act.

Mr Justice Coulson went on to state that the defendant was focussing its case on the Project as a whole, rather than the dispute which had actually been referred in the second adjudication. What matters is not whether the project taken as a whole is considered to be an excluded activity, but whether any part of the dispute concerned excluded operations – which could be deemed to be a hybrid contract (s.104(5)) and so subject to the Construction Act.

Having found that the adjudicator did have jurisdiction, the court provided additional guidance in respect of making general reservations about an adjudicator's jurisdiction. Such reservations need to be made early and need to be explicitly and unequivocally clear for a party to rely on that reservation later down the line. One cannot rely on a general reservation or grievance on the basis it tallies with a point stemming from a previous adjudication associated with the same matter and/or parties.

Notwithstanding the adjudication and jurisdiction aspects mentioned above, Mr Justice Coulson only enforced part of the adjudicator's decision (£4.5m of the £9.8m awarded to the claimant) – a "stay of execution", as the claimant was a SPV and no longer had a purpose. This is significant as once the payment of the sums awarded had been completed, the SPV would be wound down with no way of recovering any sums due if applicable.

This case confirms the courts' approach to the interpretation of "construction operations" under the Act, with s.105(1) being interpreted broadly and the exceptions under s.105(2) being interpreted narrowly. The idea that the broad purpose of a contract is ignored when determining whether aspects of a specific dispute concern excluded activities is consistent with Cleveland Bridge (UK) Limited v Whessoe-Volker Stevin Joint Venture [2010] where Ramsay J held that fabrication drawings and off-site fabrication or delivery to site were not excluded activities within the wording of s.105(2)(c).

It is therefore essential to consider whether the construction operation is excluded or not when considering whether or not to bring an action against another party. This is because the basis for a construction contract dispute may seem quite clear cut on the face of it, but may not be so clear cut if the construction operations you are contracted to fulfil are excluded works and so precluded from adjudication or other proceedings in the courts.