The power generation exemption under the Construction Act: a mixed bag

The Construction Act contains a limited exemption for certain specified activities in relation to power generation projects. Construction contracts agreed for such projects will in many cases cover a mix of activities, some of which are subject to the Construction Act and some of which are not. A recent decision of the TCC illustrates the difficulties which arise where parties are unaware of this distinction and wrongly presume that the exemption applies to the whole of their contract.

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, 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 to the exemption, 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. For example, the judge in the present case descrbed it as "uncommercial, unsatisfactory and a recipe for confusion" and not "thought through". In practice, it is not uncommon for parties to overestimate the width of the exemption and wrongly assume that the Construction Act does not apply at all to their contract. The present case illustrates the perils of such an assumption.

Severfield (UK) v Duro Felguera UK

Duro Felguera engaged Severfield to carry out the design, supply and erection of steel structures on a site in Manchester as a part of a wider project for the construction of two power generation plants. Part of the works fell within the power generation exemption, but a large part did not. The parties had unfortunately not considered the impact of the Construction Act. The payment provisions in the contract were not compliant with the Act and accordingly the statutory payment provisions of the Scheme applied to those works falling outside the exemption, whilst the contractual provisions applied to those within the exemption (as per section 104(5) of the Act which says that it applies "only so far as [the contract] relates to construction operations").

Problems arose when Severfield sought to take advantage of the payment provisions of the Scheme. In brief, it made a payment application in December 2014 for £3.8 million and Duro failed to issue a payment notice or a pay less notice on time. Severfield then commenced an adjudication on £2.5 million of that sum, being the amount it considered to reflect work falling outside the power generation exemption. It was successful but failed to enforce the decision as the adjudicator was found to have exceeded his jurisdiction for arguably deciding on items of work falling within the exemption. Severfield further revised its claim down to £1.4m by way of a lengthy and detailed letter which sought to exclude all items of work which could potentially fall within the exemption.

Severfield argued that this sum formed a sub-set of its original application and commenced summary judgment proceedings on the same basis – that Duro had failed to serve any payment or pay less notice in time. The court rejected this attempt also. Severfield’s payment application needed to be clear and unambiguous if it were to rely on the automatic entitlement conferred by the Construction Act where an employer fails to serve any payment or pay less notice. Nowhere in the payment application was the sum of £1.4 million referred to, explained or identified, and put simply the money being claimed was not the notified sum. It was not sufficient that Severfield’s application was accompanied by an itemised spreadsheet from which the £1.4 million figure had been calculated. Severfield’s revised claim required a fresh payment notice – which would have given Duro the opportunity to serve a valid payment or pay less notice in response.

The court also touched on Duro’s counterclaim for liquidated damages and contra-charges. The general rule is that sums required to be paid by the Construction Act due to the absence of payment or pay less notices cannot be avoided or reduced by set-off. However, the contract between Severfield and Duro contained a set-off provision which would have defeated a summary judgment application were the Act not to have applied to the contract (as the parties had assumed). The judge considered that it would have been inequitable to allow Severfield to overcome the set-off clause by an entitlement arising from a technical breach of the Construction Act’s payment regime, which until then neither side had applied. This was "one of the many complexities" introduced by the exemptions to the Construction Act and it was in the judge’s view "arguable that a defendant … under a hybrid contract, should be entitled to deploy the set-off in full".

Conclusions and implications

Parties entering into construction contracts for power generation projects should give careful thought to the scope of the power generation exemption and clearly identify those works which fall within it and those which do not. Where, as in most cases, a contract contains a hybrid of both types of work, the parties will often be best advised to ensure that Construction Act compliant provisions are drafted to apply to the whole of the works. Otherwise, they will face the prospect of having to operate two separate payment mechanisms with the attendant difficulties felt by Severfield in the present case.

The absence of Construction Act compliant provisions applying across the full scope of a hybrid contract also poses serious difficulties for any agreed dispute resolution procedure. The Construction Act provides a right of adjudication only in relation to those items of work falling outside the exemption, giving rise to the potential for parallel dispute resolution procedures. Where a dispute crosses the divide between works falling within the exemption and works falling outside of it, jurisdictional arguments are likely to arise and make the efficient resolution of the dispute more difficult.

References:

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