Statutory adjudication and the excluded industries
As Ciaran Williams explains, there has been much discussion about whether it is right that the adjudication legislation does not apply to a number of industries who are clearly a part of the construction industry as a whole. Has the time come for the exclusions allowed in the Construction Act to be amended or removed?
Introduction
Statutory adjudication is a valuable dispute resolution mechanism in the UK, but it is not available on all construction projects.
The Housing Grants, Construction and Regeneration Act 1996 (“the Construction Act”) introduced statutory adjudication over twenty years ago and it applies to any agreement for the carrying out of “construction operations” which is widely defined in section 105 (1). However, certain industries have been excluded from the benefits of statutory adjudication.
The excluded industries are listed in section 105 (2) of the Construction Act. They were excluded as a result of political pressure when the Housing Grants, Construction and Regeneration Bill was being debated. The excluded industries range from power generation to the production of pharmaceuticals.
There have been a number of cases over the past few years on the interpretation of section 105 (2) of the Construction Act and, in particular, its application to the energy sector. The exclusions have been narrowly construed by the courts which has limited their application; however, in several cases the courts have reluctantly decided that the Construction Act did not apply.
There has been much discussion on whether the exclusions are necessary and if they should be amended or removed. This article looks at the power generation exclusion and how it has been applied recently by the courts.
The section 105 (2) exclusions
Section 105 (2) of the Construction Act excludes the following construction operations in respect of the energy sector:
“(c) 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 -
(i) nuclear processing, power generation, …”
The application of these exclusions has usually been challenged in circumstances where a party is seeking to resist the enforcement of an adjudicator’s decision. The exclusions give rise to several interpretational issues such as the meaning of “assembly, installation . . . of plant or machinery” and “primary activity”.
Judicial criticism of the exclusions
The courts have considered the implications of narrow and wide interpretations of the exclusions and whether, for example, the construction of pipework that connected machinery and plant would be an excluded operation on a site where the primary activity is power generation. Accordingly, a body of case law has developed on the nuances of the exclusions. However, the interpretational issues still exist and the wording in section 105 (2) has been criticised by the judiciary. In the case of Severfield (UK) Ltd v Duo Felguera UK Ltd (2015) 163 Con LR 235 (TCC) Coulson J (as he then was) stated:
“All of the difficulties here, in both the old and the new proceedings, can be traced back to s.105 of the 1996 Act and the legislature's desire to exclude certain industries from adjudication.”
Further, in C Spencer Limited v MW High Tech Projects UK Limited [2020] EWCA Civ 331 (CA), Coulson LJ commented that the Construction Act was not as comprehensive as it might have been1 Coulson LJ referred to the parliamentary debates around the legislation and the suggestion of Lord Howie of Troon that the then government had yielded to the pressures of process industries and, in doing so, had lost sight of the aim of the Bill.2
Recent case law on the interpretation of the exclusions
The interpretational issues surrounding the Construction Act exclusions continue to exist and the question of whether the “primary activity” is “power generation” at an energy from waste plant was considered in the recent case of Engie Fabricom (UK) Ltd v MW High Tech Projects UK Ltd [2020] EWHC 1626 (TCC).
The facts
Engie Fabricom (UK) Ltd (“Fabricom”) was engaged by MW High Tech Projects UK Ltd (“MW”) to carry out the installation of a fluidised bed gasification plant at Cleveland Street, Kingston upon Hull. Disputes arose between the parties as to payments due under the contract and Fabricom obtained adjudication awards in its favour.
MW resisted the enforcement of the adjudication decisions on the grounds that the works were not construction operations for the purposes of the Construction Act. MW claimed that the works were for the installation of plant on a site where the primary activity was power generation and that such works are excluded by section 105 (2) of the Construction Act. Accordingly, MW claimed that there was no right to statutory adjudication and that the adjudicator’s awards were unenforceable.
Fabricom claimed that the works were for the installation of plant on a site where the primary activity was the disposal and thermal treatment of waste rather than power generation. Fabricom’s position was that the electricity generated from the thermal treatment of processed waste was ancillary to the main activity of waste treatment.
The decision
The material test in this case was whether power generation was the “primary activity” at the site. The works would not fall within section 105 (2) of the Construction Act if power generation is “merely a secondary or ancillary activity”.3
To identify the primary activity was a matter of fact,4 and to reach its conclusion the court considered the factual and expert evidence in respect of a number of material factors including: the regulatory framework; the planning approvals; the Environment Agency’s permit for the facility; the operations on the site; and the financial model for the plant.
The Court decided that the primary activity at the Energy Works Hill site was power generation based on the following reasons:
- The contract was very strong evidence that the primary purpose of the plant was energy generation, rather than waste treatment. The overriding contractual requirement was for the facility to operate as a power plant.
- Although the permit issued by the Environment Agency was for a waste incineration plant on the basis that the main purpose of the facility was thermal treatment, the permit allowed the operator to apply to change the status of the plant from disposal to recovery. MW was required under the contract to achieve recovery status and this was only possible if the principal purpose of the plant was energy recovery rather than waste disposal.
- The factual evidence indicated that the plant was not developed or intended to be operated in furtherance of any particular waste or energy policy.
- The planning permission identified that the project was developed as both a waste management facility and as a plant for power generation of renewable energy.
- The funding model was a strong indication that the intention of the owner was to operate the facility for profit as a power plant.
On the proper construction of the contract and the Construction Act the Court decided that the works fell into the exclusions and therefore did not constitute construction operations for the purposes of the Construction Act and there was no right to statutory adjudication. The adjudicator did not have jurisdiction to determine the disputes and the awards were unenforceable.
Conclusion
The case of Engie Fabricom (UK) Ltd v MW High Tech Projects UK Ltd has provided further guidance on the factors that the courts will consider when interpreting the Construction Act exclusions.
However, it is clear that the exclusions will continue to be problematic as the Construction Act does not adequately define the excluded industries. O’Farrell J stated: “There is a powerful argument for the ambit of the adjudication provisions in the 1996 Act to be reconsidered, following more than twenty years of statutory adjudication and having regard to developments in construction-related industries.”5
This follows the sentiments of Coulson LJ who commented five years earlier that the Construction Act is regarded as a blessing by the construction industry and it needs to be conferred on all those industries (such as power generation) which are currently exempt.6
The Government recently conducted a consultation on possible amendments to the Construction Act but unfortunately the consultation did not include any proposed changes to section 105 (2). For the time being, contracting parties whose work relates to the excluded industries such as power generation should expressly agree in their contracts whether the provisions of the Construction Act apply to avoid complex arguments around section 105 (2).
Hopefully there will be another opportunity for section 105 (2) to be deleted or amended in later revisions of the Construction Act.
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- 1. C Spencer Limited v MW High Tech Projects UK Limited [2020] EWCA Civ 331 (CA) paragraph 2.
- 2. C Spencer Limited v MW High Tech Projects UK Limited [2020] EWCA Civ 331 (CA) paragraph 2.
- 3. Engie Fabricom (UK) Ltd v MW High Tech Projects UK Ltd [2020] EWHC 1626 (TCC) paragraph 76.
- 4. Engie Fabricom (UK) Ltd v MW High Tech Projects UK Ltd [2020] EWHC 1626 (TCC) paragraph 77.
- 5. Engie Fabricom (UK) Ltd v MW High Tech Projects UK Ltd [2020] EWHC 1626 (TCC) paragraph 75.
- 6. Severfield (UK) Ltd v Duo Felguera UK Ltd (2015) 163 Con LR 235 (TCC) paragraph 63.