Construction Act adjudication on power generation projects: new TCC guidance

A decision of the TCC last week has provided important clarification as to the extent to which the power generation exemption in the Construction Act applies to adjudication proceedings under hybrid contracts. The exemption excludes only certain specified activities in relation to power generation projects from the scope of the Act, meaning that many construction contracts for such projects will only partly fall within the Act. The present case considers the extent to which disputes concerning the whole of a contract in such circumstances may be referred to adjudication under the Act.

The power generation exemption

The Housing Grants, Construction and Regeneration Act (the “Construction Act”) applies generally to construction work (described as “construction operations”) carried out within the United Kingdom. Certain narrow exemptions are provided for by section 105(2), including the:

“assembly, installation or demolition of plant or 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 … power generation”

There have been a number of cases over the years which have explored the width of this exemption:

• Generally speaking, a narrow approach is to be taken, the intention being not to exempt the whole of power generation projects from the Act, but only those activities concerning plant, machinery or supporting steelwork.
• Some latitude is allowed in the interpretation of the words “plant” and “machinery” – so long as individual items of work play some part in the overall process carried out by the plant or machinery, they will fall within the exemption. Conduits or electrical wiring necessary for the operation of a piece of plant will therefore form part of the “plant” for the purpose of the exemption, but not items which may be necessary only from a legal, safety or regulatory standpoint (proper lighting, for example).
• In keeping with the narrow approach, only the specified activities in relation to plant, machinery or supporting steelwork are excluded. Accordingly, a contract involving the design, fabrication and installation of supporting steelwork would fall within the Act insofar as its design and fabrication elements are concerned, but not insofar as erection of the steelwork is concerned.

The rationale for such a narrow exemption has been queried. In one recent case (Severfield v Duro Felguera), the exemption was described as “uncommercial, unsatisfactory and a recipe for confusion”. In the present case, the court noted that the reasons for such narrow wording “were and remain obscure” and created “major practical difficulties for all of us involved in the implementation of the [Construction] Act."

The exemption can cause particular problems with regard to adjudication proceedings. If the parties do not expressly provide for adjudication, the implied right to adjudicate provided by the Construction Act will apply only in relation to those aspects of a power generation project not falling within the exemption. This means that a dispute may not be capable of being referred in full to adjudication where parts of it concern works falling within the exemption.

Equitix ESI CHP (Wrexham) Ltd v Bester Generacion UK Ltd

Equitix engaged Bester to design and build a biomass power plant in Wrexham, Wales. The project suffered early setbacks and Equitix won an initial adjudication as to responsibility for delays which had occurred up until that point. The project continued to struggle and more than a year after commencement, excavation works had yet to begin. Equitix then proceeded to terminate the contract and elected not to continue with the project.

The contract permitted Equitix to submit an Interim Account with regard to termination losses. Equitix’s Interim Account totalled £11.6 million, including approximately £8 million in payments already made to Bester under the contract. After recoveries made under performance securities, an amount of £9.8 million remained outstanding.

Equitix commenced a second adjudication seeking payment of the remaining £9.8 million. Bester contested both the validity of Equitix’s termination as well as the quantum of the sums claimed by Equitix in its Interim Account. The adjudicator found in favour of Equitix and ordered Bester to pay the full £9.8 million outstanding.

Bester challenged enforcement of the adjudicator’s decision before the TCC on the basis that the dispute over the Interim Account fell outside the Construction Act.

Did the power generation exemption apply?

Bester argued that as the contract as a whole included some work which fell within the power generation exemption, a dispute as to the termination of the whole contract was outside the adjudicator's jurisdiction. Bester also noted that the contract provisions in relation to the Interim Account included certain items of compensation which were calculated by reference to the whole contract price.

The court rejected this argument. It was insufficient to focus on the scope of the overall contract. What mattered for the purpose of jurisdiction in an adjudication was whether or not some part of the dispute referred to the adjudicator related to or arose out of those narrow matters falling within the exemption. As the court noted: “Since it is common ground that no excluded operations were ever carried out by the time of the termination, there can be no jurisdictional issue.”

Preparatory works

Bester also argued that amounts claimed under the Interim Account included the repayment of milestone payments in relation to preparatory works such as the preparation of bonds and a business plan, which were outside the definition of “construction operations” in the Construction Act. In this regard, section 105(1)(e) of the Act notes that construction operations include operations “which form an integral part of, or are preparatory to, or are for rendering complete, such operations as are previously described in this sub-section, including site clearance, earth moving, excavation…”. Bester contended that only physical preparatory works were contemplated by this section.

The court also rejected this argument, noting that the references to physical works relied on by Bester were merely examples: “It would make a nonsense of the Act if every preparatory/ancillary operation not expressly identified in s.105(1) became an excluded operation. That would require s.105(1) to list everything that might ever be preparatory or ancillary, making it absurdly long.”

Conclusions and implications

This decision provides important clarification as to the operation of the power generation exemption in relation to disputes concerning the whole of a contract which includes work both within and outside the exemption. Termination of a contract is one example, but others would include disputes over formation of a contract, its rescission or rectification. Consistently with the narrow application of the exemption upheld in previous cases, the court's conclusion means that only disputes referred to adjudication which specifically relate to those narrow category of works falling within the exemption will pose jurisdiction issues.

The case also provides a reminder that the best way to avoid the difficulties thrown up by the power generation exemption is to ensure that the whole of a contract includes Construction Act compliant provisions, so that those aspects of the contract which would otherwise fall within the exemption are brought within the Act by agreement.

The court’s clarification as to the extent to which preparatory works fall within the Construction Act is also welcome. It is now clear that all kinds of preparatory works fall within the Act, save only for those narrow categories of work set out within the exemptions listed in section 105(2).

* CMS acted for the successful party in this case.

References:

Severfield (UK) Ltd v Duro Felguera UK Ltd [2015] EWHC 3352 (TCC).

Equitix ESI CHP (Wrexham) Ltd v Bester Generacion UK Ltd [2018] EWHC 177 (TCC).