Mon 11 Jan 2016

What is a construction contract?

You might think the answer would be obvious.

A construction contract is surely a contract for building something.  Well yes, it can be, but it can also be a lot of other things. And why is this important?  For one thing the payment provisions of the Housing Grants Construction & Regeneration Act 1996 ("HGCRA") (as amended) apply to all "construction contracts."  Falling foul of those payment provisions by failing to issue certain notices timeously can result in a party requiring to pay irrespective of whether it considers that payment due or appropriate.  Failure to issue a pay less notice is, arguably, the end of the matter when it comes to a claimant's entitlement to be paid (ISG Construction v Seevic College [2014] EWHC 4007) but that's a matter for another day. What is and is not a construction contract can't possibly be too difficult?

So, what is a construction contract?

The HGCRA defines a construction contract as an agreement with a person for the carrying out of construction operations, arranging for the carrying out of construction operations by others and providing labour, or the labour of others, to carry out construction operations.  It specifically includes agreements to do architectural, design or surveying work and to provide advice on building, engineering, interior or exterior decoration or on the laying out of landscapes in relation to construction operations. So that's pretty much everything.

A construction contract is a contract for construction operations?

Construction operations are defined in the HGCRA s 105.  They include those operations you would anticipate construction, repair, maintenance, demolition of buildings, structures etc.  It does not just cover buildings but also works forming part of the land including walls, roads, power lines, phone masts, runways, docks, harbours, industrial plants, land drainage and coastal protection.  So far so good.  These are all things you can envisage being built.  If you could create it with lego (or your favourite branded building blocks) it would probably be a construction operation.

Also included are the works to the inside.  The fit out, heating, mechanical and electrical systems, fire protection, security, communications systems.  And what about cleaning?  That's covered provided its in the context of construction, repair, extension or restoration.  Site clearance, excavation works are all included as are painting and decorating.  So pretty much anything you might imagine being necessary to construct, fit out and decorate any structure whatsoever.  Not so.

So it’s a construction contract, right?

Well first and foremost contracts with residential occupiers are specifically excluded from HGCRA but that's not where it ends.  Drilling for gas, extraction of minerals, nuclear processing, power generation, water effluent, production/processing or storage of chemicals, oil, gas, steel or food and drink, manufacture or building components.  These, and others, all have their own exemptions.

A recent case in the courts in England (Severfield (UK) Limited v Duro Felguera UK Limited [2015] EWHC 3352 (TCC)) highlighted the peculiar circumstances where one part of a contract is a "construction contract" and the other not.  The contract was for the design, supply and erection of steel structures in Manchester.  Sounds like a construction contract.  It involved the construction of two power generation plants, each comprising several different structures.  Hmm, so part of the works related to power generation.  That's excluded. 

The contractual provisions did not comply with the requirements of Part II of HGCRA.  No surprise there.  The parties fell out about payment.  Again, fairly predictable.  The contractor raised adjudication proceedings.  The employer made jurisdictional challenges to the adjudicator to the effect that the contract, or at least part of it, concerned excluded operations.  The adjudicator continued and made an award.  The contractor applied to the court for summary judgment (remember this is in England but the principles related to the Act apply up here in sunny Scotland too).  This was defended on the basis that the adjudicator had exceeded its jurisdiction with a counter claim including allegations of abuse of process.  A "hybrid" contract can for obvious reasons result in competing arguments regarding, amongst other things, payment mechanisms and entitlement to adjudicate. 

Hon. Mr Justice Coulson summed it up succinctly:  "If the contract is a hybrid contract, because it includes for both included and excluded operations, the inevitable result is a muddle."

What is interesting about this case is the judge's comment that the difficulties in the complex (and no doubt expensive) litigation stemmed from HGCRA itself and the exclusion of certain industries from its terms.  He opined that the  excluded industries may benefit from the clarity and certainty brought by the Act.  Perhaps a drive to clarity and certainty in contracting won't be far behind.  After all, if parties agreed that a contract is a construction contract then it must be.  Right? Well, its not quite as easy as that…

We act in all sectors of the construction industry, both "included" and "excluded" operations.  If you wish to discuss how we can assist with your contract from formation to dispute resolution feel free to get in touch. 

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