UK: The Construction Act In The Energy And Utilities Sectors

Last Updated: 6 August 2009
Article by Julian Bailey

Important construction legislation applies to the energy and utilities sectors. No-one who works in these sectors can afford to overlook it. However, there remain signs that some in those sectors are unfamiliar with the legislation, as a recent case confirms.

A Little Background

Part II of the Housing Grants, Construction and Regeneration Act 1996 (referred to as the "Construction Act" for short) is the most important piece of legislation that affects construction contracts in the UK. The two key aspects of the legislation are:

  • Payment provisions - these set out the minimum terms that regulated construction contracts must have, to ensure among other things that people who perform construction work receive regular payment.
  • Adjudication - this is a fast-track form of dispute resolution that any party to a construction contract can invoke at any time. The idea is that an adjudicator's decision on a dispute will be given within 28 days (although extensions are not uncommon), and will be readily enforceable through the courts. This means that where there is a dispute over money owing under a construction contract, the contractor can obtain a quick decision on how much (if anything) is owing, and that amount then has to be paid. However, even if money is paid in accordance with an adjudicator's decision, it may be possible to claw it back in "final" proceedings, whether they be arbitration or litigation.

These provisions are mandatory, i.e. it is not possible to "contract out" of them (although it is possible to "opt in" to their operation, if the Act does not apply to a particular contract).

The Construction Act has been in operation for more than a decade, and a substantial body of case law has evolved during that time. The legislation is (for obvious reasons) well-known in the construction industry, but little known outside of that industry.

Application to Energy and Utilities Sectors

The Construction Act applies to "construction contracts". This expression is defined broadly to include just about every type of contract for the performance of construction or engineering works, and even includes design or consultancy work for a building or engineering project.

The Construction Act applies to the energy and utilities sectors, but only in limited yet important respects. This is because the Act contains a number of specific exclusions to its scope, including importantly the:

"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...nuclear processing, power generation or water or effluent treatment...".

As the recent case of North Midland Construction plc v AE&E Lentjes UK Ltd demonstrates, this exclusion does not mean that any construction or engineering work performed on the site of a power station or water treatment plant is excluded from the Act's operation. It only applies where the work on that site is for the "assembly, installation or demolition of plant or machinery" etc.

In NMC v Lentjes the subcontractor had contracted to perform mainly civil engineering works at two power stations in the north of England. The subcontract works consisted of enabling works and then civil engineering works (involving principally the construction of foundations). The work did not involve the supply or installation of any plant or machinery, or supporting steelwork, for the power stations. The subcontracts made no provision for adjudication and the issue was whether the Act's default adjudication rules therefore applied instead. The court held that the works did not fall within the above exception to the Act's application, that the Act applied to the subcontracts and therefore adjudication was available.

Commercial Implications

It is often unclear as to whether the Construction Act applies to engineering work performed in energy and utilities projects. Part of the problem arises because the boundaries of the Act's application are not well defined, as the NMC v Lentjes case demonstrates.

Contracts such as turnkey contracts for the construction of a power station or water treatment facility will not usually be caught by the Act, because these contracts involve the supply and installation of plant or machinery.

However, packages for discrete items of work that do not of themselves involve excluded operations may be caught by the Act. These contracts (or subcontracts) will need to comply with the Construction Act. If they do not, the Act overrides the contract's operation and implies its payment and adjudication provisions into the contract. This can lead to surprising changes to project cash flow and dispute resolution, which may have a knock on effect beyond just the contract in question.

In summary, works performed on the site of a power plant or water treatment plant that may be covered by the Act include:

  • Enabling works such as excavation, and the construction of access roads
  • The construction of foundations and
  • The construction of buildings that will house plant or machinery, but which are not directly ancillary to the function of the plant or machinery.

There may be many other contexts in which the Act could apply. For example, where a wind farm is being constructed, the area of the wind turbines themselves may constitute "a site where the primary activity is...power generation", so that the construction of the erection of the turbines is not caught by the Act. But the construction of access roads, and transmission cables taking power from the wind farm to other locations, may well be caught by the legislation.

Although it is not always clear whether the Construction Act applies to a construction or engineering contract, one thing is clear: the Act simply cannot be ignored by the energy and utilities sectors, and everyone involved in the negotiation of contracts for works at power stations, water treatment plants, process plants and similar facilities needs to be familiar with the Act's operation. Where it is thought or even suspected that the Act could apply, contracts should be drafted to take account of the Act's operation, rather than let the statutory payment and adjudication provisions override the provisions agreed by the parties.

Reference: North Midland Construction plc v AE&E Lentjes UK Ltd [2009] EWHC 1371 (TCC)

This article was written for Law-Now, CMS Cameron McKenna's free online information service. To register for Law-Now, please go to www.law-now.com/law-now/mondaq

Law-Now information is for general purposes and guidance only. The information and opinions expressed in all Law-Now articles are not necessarily comprehensive and do not purport to give professional or legal advice. All Law-Now information relates to circumstances prevailing at the date of its original publication and may not have been updated to reflect subsequent developments.

The original publication date for this article was 05/08/2009.

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