Construction Contracts and Construction Operations

CONSTRUCTION CONTRACTS AND CONSTRUCTION OPERATIONS

(1) The 1996 and 2009 Acts

1.01 The provisions of the Housing Grants Construction and Regeneration Act 1996 (‘the 1996 Act’) Part II, apply only to construction contracts within the meaning contained in ss. 104, 105 and 106. This chapter considers what construction contracts are caught by the legislation. Section 107 provided that the 1996 Act applied to construction contracts that were in writing and gave rise to considerable difficulties and much case law. That requirement has since been removed by the 2009 Act, but still applies to contracts covered by the old law, namely those contracts entered into before October 2011. The requirement for writing is discussed in detail in Chapter 2.

1.02 The Local Democracy, Economic Development and Construction Act 2009 (‘the 2009 Act’) makes certain amendments to the 1996 Act but makes no changes to ss. 104 and 105 and retains the exemption for contracts made with residential occupiers at s. 106. The only change introduced to these provisions by the 2009 Act concerns the ability of the Secretary of State to make an order excluding any description of construction contract from the operation of the Act. The original provision at s. 106(2) has been deleted and replaced with a new s. 106A whereby the power is now divided between the Secretary of State, the Welsh Minister, and the Scottish Ministers in relation to their own territories.¹

(2)What Is a Construction Contract?

1.03 Section 104(1) provides a wide definition of ‘construction contract’ as being an agreement with a person for (a) the carrying out of construction operations; (b) arranging for the carrying out of construction operations by others, whether under subcontract to him or otherwise; or (c) providing his own labour, or labour of others, for the carrying out of construction operations. As a matter of statutory interpretation, a person includes a body of persons corporate or unincorporated.²

1.04 Section 104(2) broadens the categories of construction contract to include professional service contracts. Construction contracts thus also include an agreement to do architectural, design, or surveying work³ or to provide advice on building, engineering, interior or exterior decoration, or on the laying-out of landscape, subject to the overriding caveat that activities described in s. 104(2) must be ‘in relation to construction operations’⁴

1.05 The meaning of ‘construction operations’ is thereafter defined in s. 105(1) by detailed list of operations covered by the Act. Operations which are exempt from being treated as construction operations for the purposes of the legislation are identified in s. 105(2). Contracts with residential occupiers are said to be wholly outside the operation of Part II of the Act and the Secretary of State may, by order, exclude any other description of construction contract from the operation of the Act (s. 106).⁵

Contracts Affected by the 1996 Act

1.06 In England Wales and Scotland Part II of the 1996 Act came into effect on 1 May 1998⁶ and applies only to construction contracts entered into after that date’? The Construction Contracts (Northern Ireland) Order 1997 No. 274 (NI l) brought Part II of the Act into operation in Northern Ireland. The commencement date for Northern Ireland was 1 June 1999.⁸ An adjudicator has no jurisdiction to determine a dispute arising out of a construction contract made before the 1996 Act came into effect⁹ or where the construction operations are not carried out in a qualifying territory (s. 104(6)).

1.07 It was decided in Christiani & Nielsen Ltd v Lowry Centre Development Company Ltd (2000)’¹⁰ that a contract entered into after the commencement of the Act but taking effect from an earlier date before the commencement of the Act was nevertheless governed by the provisions of the Act. The date a contract is executed is not necessarily the date it is entered into. In Atlas Ceiling & Partition Co. Ltd v Crowngate Estates (Cheltenham) Ltd (2002)¹¹ a contract was signed in April 1998 but was not entered into until certain outstanding matters were resolved at a later date, thus bringing the agreement within the scope of the Act.

Contracts Affected by the 2009 Act

1.08 The amendments will apply to construction contracts entered into after the 2009 Act came into force in the respective territories.¹² The new provisions apply from 1 October 2011 in England¹³ and Wales¹⁴ and, from 1 November 2011, in Scotland.¹⁵ The location of the construction operations determines which commencement order applies. The 1996 Act continues to apply to contracts made after 1 May 1998 and before the commencement of the new Act.

Changes to Existing Contracts after Commencement of the Act

1.09 After the 1996 Act was passed there were a number of cases about whether the Act applied to contracts made before the Act came into effect but varied afterwards. The same principles will apply to the application of the 2009 Act and so are considered here. In Earl’s Terrace Properties Ltd v Waterloo Investments Ltd (2002) (Key Case)¹⁶ it was decided that where parties entered into a construction contract prior to 1 May 1998 but varied the contract after that date, the variation would usually not bring the contract within the scope of the Act. However, where the variation is capable of being construed as a construction contract in its own right, then the variation itself could attract the provisions of the Act. Judge Seymour in Earls Terrace left open the question as to whether a variation made to a contract outside the provisions of the Act can ever have the effect of bringing the whole contract within the statutory scheme. In contrast, a novated contract is a new agreement so that a contract made before 1 May 1998 could fall within the scheme of the Act by virtue of a novation agreement made after 1 May 1998; Yarm Road Ltd v Costain Ltd (2001).¹⁷

Construction Operations in Qualifying Territory

1.10 The Act applies to construction contracts for the carrying out of construction operations in England, Wales, or Scotland. The Construction Contracts (Northern Ireland) Order 1997 No. 274 (NI l) brought Part II of the Act into operation in Northern Ireland. It is the location of the construction operations which will determine which commencement order applies. Operations carried out on offshore installations are not within the scope of the Act: Staveley Industries plc v Odebrecht Oil & Gas Services Ltd (2001).¹⁸

Crown Contracts

1.11 The 1996 Act applies to construction contracts entered into by the Crown, save for where the contract is made by Her Majesty in a private capacity, and to contracts made by the Duchy of Cornwall. Special provisions are made regarding how the Crown or Duchy is to be represented in any adjudication proceedings.¹⁹

Contracts for the Carrying Out of Construction Operations

1.12 Construction contracts are dealt with in two broad categories by s. 104: those concerned directly with the carrying out of the construction operations (s. 104(1)) and those connected agreements made ‘in relation to the construction operations’ such as agreements for architectural, design, surveying or advice work (s. 104(2)).

1.13 ‘Construction contracts’ in the first category are agreements with a person for the actual performance of construction operations and include agreements solely to provide labour to perform construction operations.²⁰ Also in this first category are agreements which constitute ‘arranging for the carrying out of construction operations by others, whether under subcontract to him or otherwise’.²¹ There is no explanation in the statute as to what activities fall within this latter type of contract. It appears to be directed towards main contracts and management contracts where the contractor does none of the work itself but arranges for others to perform the construction operations. It has been found to be wide enough to cover a surveyor’s agreement to administer a building contract.²²

1.14 The common ingredient in the three subsections of s. 104(1) is the ‘carrying out of construction operations’ which suggests that only those individuals who have a direct connection with the work itself are intended to be caught. It is submitted that contracts which have a more indirect role in arranging for the performance of construction operations, such as certain funding agreements, are not intended to be covered by this provision. This is consistent with the fact that finance agreements and development agreements are expressly excluded from the ambit of the Act pursuant to S1 1998 648.

Professional Agreements in Relation to Construction Operations

1.15 Professional services contracts are brought within the ambit of the Act by s. 104(2). There are two limbs to s. 104(2). First the contract must be one to perform work of the character described in sub-ss (a) or (b) and secondly that work must be work ‘in relation to construction operations’. Consequently a construction contract includes an agreement (a) to do architectural, design, or surveying work, or (b) to provide advice on building, engineering, interior or exterior decoration or on the laying-out of landscape, where such agreements are ‘in relation to construction operations’.

1.16 Work is performed in relation to construction operations when it is incidental to the actual performance of the construction operation itself, or is directly connected to it. Accordingly giving factual evidence in an arbitration is an activity which is incidental to the arbitration and not to the actual performance of the construction operation: Fence Gate Ltd v J. R. Knowles Ltd (2001) (Key Case).²³ An agreement to perform contract administration services qualifies as surveying work in the terms of s. 104(2)(a): Gillies Ramsay Diamond v PJW Enterprises Ltd (2002).²⁴

1.17 Pursuant to s. 104(2) a professional may seek adjudication for outstanding fees,²⁵ and professional negligence allegations can be submitted to adjudication, as was the case in Gillies Ramsay Diamond v PJW Enterprises Ltd (2002).²⁶

Agreement Relating to Construction Operations and Other Matters

1.18 If a contract relates to construction operations as well as other matters the Act applies to such an agreement ‘only so far as it relates to construction operations’ (s. 104(5)). The qualifying construction operations are to be treated as severable from the other matters so that the adjudication and payment provisions of Part II will apply to the construction operations alone.²⁷

1.19 This means an adjudicator may have jurisdiction in a statutory adjudication to determine disputes over part of a contract but not over other issues. It is not difficult to see how this could give rise to difficulties if, for instance, an adjudicator was asked to decide a dispute about payment which concerned both construction operations and other matters and the issues could not be severed. In North Midland Construction plc v AE&E Lentjes UK Ltd (2009)²⁸ Ramsey J suggested that in such a situation it might be impossible to apply the adjudication provisions of the Act to only part of a dispute so that ultimately the Act could not be applied at all.²⁹ In Cleveland Bridge (UK) Ltd v Whessoe-Volker Stevin Joint Venture (2010)³⁰ the adjudicator’s decision concerned matters covered by the Act and matters exempt under s. 105(2). On the facts the decision could not be severed with the result that the entire decision was unenforceable.

1.20 In many cases however contracts will contain a written agreement to adjudicate disputes under that contract, such as is to be found in many standard forms. These agreements rarely differentiate between the type of dispute that may or may not be adjudicated, and the problem identified above will not arise. In particular cases this may mean the contractual adjudication provisions are wider than required by statute but this will not undermine their efficacy as the parties are entitled to agree to adjudicate whatever matters they choose. As a consequence an adjudicator acting in an adjudication brought under a contractual adjudication provision is unlikely to have to consider the difficulties raised by s. 104(5) of the Act.

Contract of Employment

1.21 A contract of employment (within the meaning of the Employment Rights Act 1996) is not a construction contract for the purposes of the Act.³¹

Agreements to Vary, Supplement, or Settle a Construction Contract

1.22 The question has arisen as to whether an agreement made after a construction contract and related to it will itself be governed by the Act’s provisions. Most commonly this issue will occur in relation to variation agreements, supplemental contracts, side agreements, or settlements of issues arising out of the construction contract itself. It is a matter of construction in each case whether the secondary agreement is itself a construction contract.

1.23 In general terms, if an agreement is a variation to the original construction contract a dispute arising thereunder will fall within the scope of the dispute resolution provisions of the construction contract. Consequently it will attract the adjudication provisions of the Act or any express adjudication clause that is contained in the contract.

1.24 A stand-alone settlement agreement made in full and final settlement of all claims will not automatically be a construction contract simply because it compromises a construction contract, nor will it be covered by the adjudication provisions in the primary contract³² (unless those are drafted broadly enough).³³ It will be a matter of interpretation in such a case as to whether a stand-alone settlement agreement is itself a construction contract within Part II of the Act.

1.25 Side agreements that can be construed as variations to the construction contracts will usually be subject to the right to adjudicate in that agreement. A side agreement that is independent of the construction contract will not be subject to the adjudication provisions in the Act unless the side agreement itself is a qualifying construction contract. However if the side agreement is a qualifying construction contract it follows that disputes arising under that agreement will have to be adjudicated separately from those under the original construction contract, unless the parties widen the jurisdiction of the adjudicator or there is an express term in the applicable adjudication rules which enables the adjudicator to hear related disputes under different contracts (as is found in paragraph 8(2) of the Scheme for Construction Contracts—but this requires the consent of the parties).

1.26 The reported cases on this subject deal primarily with the issue of the true nature of the supplemental agreement, whether a variation or stand-alone agreement, rather than whether it was a qualifying construction contract itself. In Melville Dundas Ltd v Hotel Corporation of Edinburgh Ltd (2006),³⁴ Lord Drummond Young made the distinction between settlements that were independent of the construction contract and other forms of settlement which purported only to agree a sum due under the contract terms, such as an agreement that contractual retention should be fixed at a specified sum. In that case an agreement of the latter variety was not independent of the construction contract and would be given effect through the mechanisms available under the construction contract. As a consequence it was subject to the provisions of the Act. Lord Drummond Young recognized that some settlements could be a combination of both forms.³⁵

1.27 An adjudicator is entitled to consider whether the dispute referred has been compromised by a stand-alone settlement agreement but as that issue goes to his jurisdiction he cannot make a binding decision on this point unless given power to do so by the parties (this topic is discussed in more detail in Chapters 5 and 9). The court can consider the question ofjurisdiction afresh: Quarmby Construction Co. Ltd v Larraby Land Ltd (2003).³⁶ In the circumstances of that case the claim referred to adjudication had not been compromised by the settlement, the adjudicator had jurisdiction and his decision was valid.

1.28 It is a question of construction whether a collateral warranty is a construction contract within the meaning of the Act. It is thought that where such an agreement simply warrants compliance with a building contract, as is commonly the case in standard-form warranties between employer and subcontractor, that is not an agreement for the carrying out of construction operations. It would be odd if the Act operated to imply the payment provisions of ss. 109-11 into such a warranty, where the original agreement has no obligations as to payment.

Key Cases: s. 104