UK: Meaning of Construction Operations, Adjudication and Severability

Last Updated: 25 August 2010
Article by Christopher Hill, Steve Abraham and Donald Warnock

An adjudicator's decision is binding unless and until it is finally determined by litigation, arbitration, or agreement between the parties. There are two principal grounds for avoiding enforcement of an adjudicator's decision. These are where the adjudicator had no jurisdiction or exceeded his jurisdiction; and where the adjudicator failed to apply the rules of natural justice or was biased in reaching his decision.

The rights and obligations imposed by Part II of the Housing Grants, Construction and Regeneration Act 1996 (the Construction Act) apply only to construction contracts which are in turn defined by reference to agreements for the carrying out of "construction operations".

The issues in the following case were:

  • whether the sub-contract works (or part of the sub-contract works) were excluded "construction operations" by virtue of section 105 (2) (c) of the Construction Act; and
  • to the extent that there were construction operations and works which were not construction operations what effect did this have on the jurisdiction of the adjudicator?

Cleveland Bridge (UK) Ltd v Whessoe-Volker Stevin Joint Venture [2010] EWHC 1076 (TCC)

The contractor engaged a sub-contractor to carry out works at the Dragon Liquefied Natural Gas terminal at Milford Haven. A dispute arose concerning payment of the outstanding amount of Ł317,500 in respect of the agreed final account to the sub-contractor. The contractor refused to pay on the basis that as a result of a settlement agreement between the parties no further sum was due.

The sub-contractor referred the matter to adjudication and the adjudicator decided in favour of the sub-contractor. The contractor participated in the adjudication without prejudice to its primary contention that the adjudicator did not have jurisdiction and subsequently challenged the enforcement of the adjudicator's decision.

Did the relevant work come within the meaning of construction operations or was it excluded work within the meaning of section 105 (2) of the Construction Act?

The sub-contract works (in summary) consisted of the:

  • supply, fabrication, delivery and erection of steel work in the form of piperacks and pipebridges;
  • construction of the Local Equipment Room building and compressor house; and
  • painting of steel work.

Section 105 (1) of the Construction Act provides that "construction operations means, subject as follows, operations of the following descriptions" which it then describes in a long list in sections105 (1) (a) to (f).

Section 105 (2) sets out which operations are then excluded from the meaning of "construction operations." These operations are defined in section 105 (2) (a) to (e).

Of relevance to this case is section 105 (2) (c) (ii) which excludes the following operation:

"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 -

(ii) the production, transmission, processing or bulk storage ... of ... gas..."

(the "Steelwork Exclusion").

It was common ground that the primary activity at the site was the production, transmission, processing or bulk storage of gas.

The Steelwork Exclusion

The sub-contractor argued that all the sub-contract works were construction operations and that it was only the erection works for the steel work to the piperacks and pipebridges which had the potential to fall within the Steelwork Exclusion. The sub-contractor also contended that the erection work for the steelwork comprised only 18 percent of the value of the sub-contract works.

The contractor conversely sought to establish that the steel work to the piperacks and pipebridges was significant and substantial work which was caught by the Steelwork Exclusion.

The court's approach to the Steelwork Exclusion

Mr Justice Ramsey set out in North Midland Construction Plc v AE&E Lentjes [2009] EWHC 1371 (TCC) (reported in the August 2009 edition of the Construction Updater) that:

  • there would always be certain aspects of every contract which at the boundaries might either be argued to be construction operations within the ambit of the Construction Act or within one of the excluded operations and outside the Construction Act;
  • what was required was for the relevant works to be looked at broadly to see whether or not they came within the exception in section 105 (2); and
  • it was not the intention of the Construction Act for there to be a minute analysis to find an item which was a construction operation or which was within one of the exceptions when a commonsense analysis would provide a straightforward answer.

Applying those principles the court found that the steelwork to the piperacks and the pipebridges was significant and substantial work and when looked at on a straightforward and commonsense analysis, came within the Steelwork Exclusion. This was not a case where the steelwork to the piperacks and pipebridges, looked at broadly, could be said as a matter of fact and degree not to fall within the Steelwork Exclusion.

The court's approach to the precise scope of the Steelwork Exclusion

The court next had to consider the precise scope of the work to the piperacks and the pipebridges to ascertain whether the Steelwork Exclusion applied to all work related to the steelwork (such as the steelwork fabrication drawings and delivery of the steelwork to the site) or whether the exclusion only applied to the "erection" element of the steelwork.

The contractor submitted that the commonsense construction included the supply and delivery of steelwork because steelwork could not be erected unless it was supplied and that the criterion for exclusion from the Construction Act was the character of what was being considered, i.e. steelwork, and not whether it was the supply or the installation of that steelwork.

In construing the meaning of section 105 (2) the court adopted an objective approach - the meaning that would be conveyed to a reasonable person having all the relevant background knowledge.

The court considered that the provisions of section 105 (2) (a) to (c) were aimed at excluding particular operations either generally or in specific industries. For those industries the exclusion was for particular operations on sites where the primary activity was one of the industries.

The court noted that the definition in section 105 (2) had not been broadened as it has been in section 105 (1) (e) by the use of the words:

"operations which form an integral part of, or are preparatory to, or are for rendering complete, such operations."

In addition, the phrase - "assembly, installation ... of plant or machinery" in section 105 (2) (c) should be construed narrowly following North Midland Construction.

As a result the court was of the view that:

  • a narrow construction of the exclusions in section 105 (2) (c) was required;
  • it was difficult on a natural meaning of the word "erection" to include fabrication of steelwork off-site or the delivery of pre-fabricated steelwork to site;
  • erection of steelwork essentially covered the operation of lifting the steelwork into position and connecting it together;
  • there was no reason to widen the scope of the exception and no reason why "erection ... of steelwork" should include "manufacture or delivery to site of ... steelwork"; and
  • the wording of 105 (2) (c) was unambiguous and had the effect of excluding operations which are carried out on site.

Accordingly, the court held that the only operation which was excluded from being a construction operation in the sub-contract by the Steelwork Exclusion was the erection of the steelwork for the piperacks and pipebridges and not the prior activities relating to the erection of that steelwork.

To the extent that there were partly excluded construction operations what effect did this have on the jurisdiction of the adjudicator?

Section 104 (5) of the Construction Act sets out the position that applies where one agreement relates to both construction operations caught by section 105 (1) of the Construction Act and those works which are excluded by section 105 (2). The Construction Act applies only in so far as the agreement relates to those construction operations which fall within the Construction Act. It follows therefore that the right to refer a dispute to adjudication applies only to those construction operations in the sub-contract which fall within the ambit of the Construction Act.

Did the sub-contractor refer a valid dispute to adjudication?

The sub-contractor sought to argue that:

  • the dispute referred to adjudiction was essentially a dispute as to who was liable to pay the outstanding amount under the final account. As a result, even if part of the work was not a construction operation, because of the nature of the dispute, the adjudicator could still find in practice that the whole of the outstanding amount was due and payable to the sub-contractor; alternatively
  • if the adjudicator only had jurisdiction to consider that part of the dispute which related to construction operations then the sub-contractor had requested the adjudicator to consider and award the proportion of the outstanding amount which related to that work which would allow the decision to be severed if necessary on enforcement.

The contractor maintained that the dispute that was referred to adjudication was a single dispute concerning payment of outstanding monies but that the adjudicator did not have jurisdiction to hear that dispute since it related in part to work that was a construction operation and in part to work that did not amount to a construction operation.

The court held that:

  • there was one dispute that was referred to the adjudicator which concerned whether the outstanding amount in the agreed final account was due and payable to the sub-contractor;
  • the effect of section 104 (5) of the Construction Act was that the adjudicator did not have jurisdiction to deal with the whole of the dispute - the adjudicator only had jurisdiction to deal with the dispute insofar as it related to "construction operations" in the sub-contract; and
  • the adjudicator's decision related to the whole of the dispute - the adjudicator did not make any decision which dealt with the sub-contractor's alternative position (over which she did have jurisdiction).

Could the decision be severed?

In the absence of a decision in respect of part only of the dispute, the court had to address the question of whether the adjudicator's decision in respect of the whole dispute could be severed to enable that the part of the decision made with jurisdiction to be enforced and separated from the part of the decision made without jurisdiction.

The court referred to the case of Cantillon Limited v Urvasco Limited [2008] BLR 250 which we reported on in our March 2008 edition of the Construction updater where Mr Justice Akenhead set out the following:

"In all cases where there is a decision on one dispute or difference, and the adjudicator acts, materially, in excess of jurisdiction ... the decision will not be enforced by the court."

The court held that it was clear that where there was an overall dispute as to payment, delay or disruption arising in part from construction operations and in part from other excluded operations then the adjudication provisions could not be applied to only part of that overall dispute. A decision made which was partly outside the jurisdiction of the adjudicator resulted in the whole of the decision being unenforceable. If however the overall dispute could be divided so that part of the overall dispute related only to construction operations then that part could be referred to adjudication.

As a result, the court was unable to sever the decision of the adjudicator and award to the sub-contractor a sum for the relevant part of the sub-contract works that was a construction operation. The contractor therefore succeeded in resisting the enforcement of the adjudicator's decision.

Editors' comments

The case confirms that section 105 (2) (c) (ii) of the Construction Act will be interpreted narrowly.

With regard to severability of an adjudicator's decision the case confirms that the parties have to accept a decision of the adjudicator "warts and all" (Lloyd J QC in KNS Industrial Services (Birmingham) Limited v Sindall Limited (2001) 75 Con LR 71). Unless the court is finally determining the dispute, the court will not interfere with a decision of the adjudicator or seek to dismantle or reconstruct a decision so as to work out what an adjudicator might have decided in respect of the element of the works within the jurisdiction of the adjudicator.

View: Cleveland Bridge (UK) Ltd v Whessoe-Volker Stevin Joint Venture [2010] EWHC 1076 (TCC)

This article was first published in the Norton Rose Construction and infrastructure updater June 2010

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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