Dealing with hybrid contracts? You may want to expressly state the payment mechanisms
This month I am going to look again at payment provisions under The Housing Grants, Construction and Regeneration Act 1998 (the “Construction Act”), but this time focusing on how they apply to “hybrid” contracts – where the contractor or consultant is engaged for a range of services, some of which are “construction operations” and some of which aren’t.
The case of C Spencer Limited v MW High Tech Projects UK Limited is a recent High Court case where the central issue was whether or not the payment mechanisms under the Act apply to all payments under a hybrid contract.
The Law
The Construction Act applies to all “construction operations” save for a number of exemptions which are set out in Section 105. One of these exemptions includes:
“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”
A “hybrid” contract occurs when there is a mix of construction and non-construction operations, this can cause confusion on contracts, particularly where payment and adjudication provisions come into force.
The Facts
In this case MW High Tech Projects UK Limited (“MW”) was appointed as the main contractor to design and construction a waste to energy type power plant in Hull. C Spencer Limited (“CSL”) was subcontracted by MW to design and construct the civil, structural and architectural works.
It was common ground between the parties that the sub-contract works included construction operations as well as non-construction operations which fell under the Section 105 Construction Act exclusions. The periodic interim payment mechanism under the contract was compliant with the Construction Act but made no distinction between the construction and non-construction operations.
A payment dispute arose after CSL issued a payment application which split the amounts applied for into construction operations and non-construction operations. However, when issuing their subsequent payment notice, MW did not distinguish between the two amounts. CSL challenged the validity of the payment notice on the basis that MW failed to distinguish between the 2 operations. MW argued that its payment notice was valid and contended that the express payment mechanism agreed between the parties did not require the separate identification of the sums considered to be due as it complied with the requirements of the Act
The Decision
Judgment was made in favour of MW. It was held that a contractual payment mechanism that is compliant with the Construction Act will apply to all payments under a "hybrid" contract. This will include payments due in respect of both construction works and works excluded from the definition of construction operations under the Construction Act.
While it was correct that the Construction Act only applied insofar as works that were construction operations, parties are free to agree that the payment mechanism could apply equally to other works and services provided under the contract.
The outcome here differed somewhat to the outcome in the earlier case of Severfield (UK) v Duro Felguera UK. In this case, the contract between the parties failed to agree a payment mechanism that was compliant with the Construction Act. The Court found that a distinction between the sums due for both construction and non-construction operations had to be made.
Both cases mentioned in this article conclude that parties should make sure that all hybrid contracts expressly include Construction Act compliant payment mechanisms. This should reduce the risk of confusion and disputes which could stem from operating separate systems for construction operations and non-construction operations.
This same point also applies to adjudication. The Construction Act provides a right of adjudication in relation to the construction operations only, giving rise to the same confusion and potential disputes in hybrid contracts. Therefore, a right to adjudicate should also be expressly included in a hybrid contract if the parties wish for that to be the case.
These notes have been prepared for the purpose of an article only. They should not be regarded as a substitute for taking legal advice.