What works are “construction operations” for the purposes of Housing Grants, Construction and Regeneration Act 1996 (the 1996 Act)? – The need for specialist advice

What is the 1996 Act and why is it important?

The 1996 Act (as amended by the Local Democracy, Economic Development and Construction Act 2009) is a critical piece of legislation affecting the industry and introduced, what are by now, a well-known range of measures governing construction contracts. Perhaps the most notable are the following measures:

• Stage payments (s109);
  
  
• Dates for payment and payment notices (s110);
  
  
• Right to suspend works for non-payment (s112);
  
  
• Prohibition on conditional payments (113); and
  
  
• Right to adjudication (s108).

The purpose of the legislation was to introduce a minimum standard of contractual terms to be included in construction contracts. The above measures are, as result of the legislation, implied into a construction contract where the terms agreed between the parties fall short of the minimum prescribed or where the parties have not agreed anything substantive (i.e. where there is a simple oral contract).

What is a construction contract?

It is generally accepted that the legislation provided a much needed framework of contractual measures for those operating in the industry, particularly for contractors and sub-contractors. However, the legislation does not apply to everybody that you might first expect that it would.

The first section in the relevant part of the 1996 Act (section 104) seeks to define a “construction contract”. Section 104 says that a construction contract is an agreement for:

• the carrying out of construction operations;
  
  
• arranging for the carrying out of construction operations by others, whether under sub-contract to him or otherwise; and
  
  
• providing his own labour, or the labour of others, for the carrying out of construction operations.

What are “construction operations”?

Section 105 (1) of the 1996 Act then tells us, in a fair amount of detail, what is meant by ‘construction operations’ in determining whether there is a construction contract under section 104. In summary, section 105 (1) says that, ‘construction operations’ include the construction, alteration, repair, maintenance, extension, demolition or dismantling of:

• buildings or structures forming, or to form, part of the land whether permanent or not; and
  
  
• any works forming, or to form, part of the land, including walls, roadworks, power-lines, telecommunication apparatus, aircraft runways, docks and harbours, railways, inland waterways, pipe-lines, reservoirs, water-mains, wells, sewers, industrial plant and installations for purposes of land drainage, coast protection or defence.

Section 105 (1) goes on to say that the installation in any building or structure of fittings forming part of the land, including systems of heating, lighting, air-conditioning, ventilation, power supply, drainage, sanitation, water supply or fire protection, or security or communications systems are “construction operations”.

What are not “construction operations”?

Section 105 (2) details what are not considered construction operations for determining whether there is a construction contract under section 4. In summary section 5(2) says that the following are not construction operations:

• drilling/extraction for oil or natural gas;
  
  
• mineral extraction through tunnelling or boring;
  
  
• assembly, instillation or demolition of plant/machinery, or the erection or demolition of steelwork for the purposes of supporting/providing access to plant/machinery, on a site where the primary activity is:
• Nuclear processing, power generation or water/effluent treatment; or
• Production, transmission, processing or bulk storage (other than warehousing) of chemicals, pharmaceuticals, oil, gas, steel or food and drink
  
  
• manufacture or delivery to site of building/engineering components or equipment,  materials, plant/machinery or components for systems of heating, lighting, air conditioning, ventilation, power supply, drainage, sanitation, water supply, fire protection, security or communications systems, save where the contract also provides for their instillation;
  
  
• the making, installation and repair of artistic works, being sculptures, murals and other works which are wholly artistic.

What is clear from section 105(2) is that an arbitrary distinction has been made by Parliament as to which industries are not within the scope of the 1996 Act. For the mineral, energy, water, pharmaceutical, chemical, and food and drink industries, plant assembly or installation works where the primary activity of the site concerns processing operations are not to benefit from the measures introduced by the 1996 Act.

While the drafting in s105(2) means that an arbitrary distinction is made, the courts have adopted a more flexible approach when it comes to interpreting the section. The case law suggests that the courts interpret the excluded works in the narrowest sense, where possible.

In North Midland Construction plc v A E E Lentjes UK [2009] EWHC 1371 (TCC) the Court found that a sub-contractor’s enabling and civil works at a site where a flue gas desulphurisation plant was going to be installed did not fall within the exclusion under s105(2). North Midland had contracted to provide temporary fencing, roads, offices and drainage at the site, as well as demolition and foundations works. The Court held such works were preparatory in nature and could not be regarded as works under section 105(2)(c), even though the primary activity of the site would be power generation.

In Cleveland Bridge (UK) Ltd v Whessoe-Volker [2010] EWHC 1076 (TCC) the Court had to split the operations performed by Cleveland Bridge into those excluded and those within the 1996 Act’s remit. Cleveland had been carrying out works at a liquefied natural gas terminal. The Court found that Cleveland’s prior fabrication drawings, off-site fabrication and delivery were not excluded works but that the erection of steelwork to pipe racks and pipe bridges at the gas terminal were.

Given that the Courts are willing to take a narrow view as to what works are excluded under the 1996 Act, it follows that the parties to a contract may end up with differing rights and remedies in relation to different aspects of the work undertaken. In Severfield (UK) Ltd v Duro Felguera UK Ltd [2015] EWHC 3352 (TCC) the Court suggested that where such contracts were to come in to being, it would be sensible for the parties to agree contract terms that were 1996 Act compliant.

What other types of works are not construction operations under the 1996 Act?

Other types of contracts for works have been specifically excluded by secondary legislation made under the 1996 Act, these include:

• agreements for highway works;
  
  
• planning agreements;
  
  
• externally financed development agreements;
  
  
• top tier private finance initiative contracts;
  
  
• certain finance agreements, for example contracts of insurance; and
  
  
• development agreements where either freehold land will be sold, or a lease of 12 months or more will be entered into, following the completion of site works.

Section 106 of the Act also excludes construction contracts where one of the parties occupies or intends to occupy the site as a dwelling. This means that individuals having an extension to their existing home, or a new home built, are not able to rely on the statutory rights and remedies under the 1996 Act.

The residential occupier exclusion was tested in Edenbooth Ltd v Cre8 Developments Ltd [2008] EWHC 570 (TCC). Edenbooth was seeking to rely on the right to adjudication under the 1996 Act. Cre8 argued that it did not apply, as the property would ultimately be occupied by an individual. The Court took into account that Edenbooth was a company and not an individual occupier and found that the Act applied to the contract.

The need for specialist advice

Whether or not a contract falls within the definition of a construction contract under the 1996 Act can be a very technical issue. At the outset, the parties must bear in mind that if the contract is excluded under the 1996 Act, key statutory rights and remedies will not be available. Equally, those parties contracting on an oral basis, or with little in writing, need to bear in mind that their contract might be subject to the rights and remedies afforded by the 1996 Act, because the contractual services provided will be regarded as constriction operations.

With advice prior to the formation of a construction contract you stand the best chance of avoiding any disputes as to the applicability the 1996 Act and the consequent mechanisms for payment and dispute resolution available to you.

These notes have been prepared for the purpose of an article only. They should not be regarded as a substitute for taking legal advice