Do I have a "Construction Contract" for the purposes of the Construction Act?

28 January 2015


The case of Savoye and Savoye Ltd v Spicers Ltd serves as a reminder that the provisions of Part II of the Housing Grants Construction and Regeneration Act 1996 (also known as the Construction Act 1996) can have wider application than some contracting parties might realise.

Contracting parties need to be alert to the potential application of the Construction Act to avoid being caught unaware by implied terms.

The case

In 2013 Savoye and Savoye Ltd (Savoye) were engaged by Spicers Ltd (Spicers) to design, supply, supervise and commission a new conveyor system at a factory site at Smethwick in the West Midlands. The works were completed towards the end of 2013 but there were ongoing disagreements between the parties regarding sums of money said to be outstanding, and the quality and performance of the installation.

On 30 June 2014, Savoye gave notice of adjudication to Spicers, in relation to a dispute over payment. The adjudicator found in favour of Savoye, based in part on the implied payment provisions within the Construction Act's 'Scheme'.

In the enforcement action which followed, Spicers pursued its argument (originally raised during the adjudication) that the adjudicator did not have jurisdiction to decide on the matter because the installation did not amount to "construction operations" and therefore the contract was not caught by the Construction Act.

Why does it matter?

Where parties enter into a "construction contract", the Construction Act (referred to in the rest of this article as the Act) imposes:

  • The right for either party to refer disputes arising under the contract to adjudication (and where provision is not made in the contract for this, the statutory 'Scheme' will impose procedural rules for the carrying out of the adjudication);
  • An entitlement for the contractor (or consultant) to be paid in instalments, unless the contract specifies, or the parties agree, that the duration of the work is less than 45 days;
  • A requirement for the contract to comply with the payment mechanisms laid down by the Act. If the contract does not include the required mechanism and notice requirements, then gaps will be filled by implied terms. This means that the payment terms initially agreed between the parties could, at least in part, be overruled by the Act, and (as Spicers found to its detriment) the employer could find itself in default of payment obligations and liable for interest because it has not served the required payment and pay less notices (see our alert on pay less notices here); 
  • An entitlement for the contractor (or consultant) to suspend work for non-payment in accordance with the contractual or implied statutory payment provisions (and to recover its reasonable expenses of exercising the right from the employer).

It is in the interests of both parties to understand from the outset whether the contract they are entering into is subject to these provisions, so that they have a full appreciation for their rights and obligations.

What is a "construction contract" for the purposes of the Act?

The Act defines a "construction contract" as being an agreement with a person for any of the following:

  • the carrying out of "construction operations";
  • arranging for the carrying out of "construction operations" by others;
  • providing his own labour or the labour of others for the carrying out of "construction operations".

The definition expressly includes contracts with construction professionals carrying out architectural, design or surveying work, or advice on building, engineering, interior or exterior decoration and the laying out of landscape in the relation to "construction operations".

Contracts of employment (within the meaning of the Employment Rights Act 1996) are specifically excluded.

The decision in the Savoye case turned on whether the works being carried out were, in fact, "construction operations".

"Construction operations"

The definition in the Act covers operations of any of the following descriptions;

  • construction, alteration, repair, maintenance, extension, demolition or dismantling of buildings or structures, or any other works forming, or to form, part of the land (including walls, road works, telecoms apparatus, transport and utilities infrastructure and industrial plant);
  • installation in any building or structure of fittings forming part of the land (including services systems for heating, lighting, air conditioning, sanitation and ventilation, communication and security systems);
  • external or internal cleaning of buildings and structures, so far as carried out in the course of their construction, alteration, repair, extension or restoration;
  • operations which form an integral part of, preparatory to, or for rendering complete any of the above (such as site-clearance, excavation or scaffolding construction and removal contracts); and
  • painting or decorating of the internal or external surfaces of any building or structure.

In the Savoye case, Mr Justice Akenhead considered closely whether the installation in question amounted to an installation of works that would "form part of the land".

It may also come as a surprise to those not familiar with the Act, that contracts for the cleaning of buildings and structures can in some cases fall within its remit, as can painting and decorating.

When do works or installations "form part of the land"?

Mr Justice Akenhead held in Savoye that whether something "forms part of the land" is a question of fact and degree in each case. This factual test can be informed by the law of property relating to "fixtures" (although it is not a pre-requisite that the installed item is a "fixture"). Mr Justice Akenhead summarised the influencing factors as follows:

  • For something to be "part of the land" an object must be annexed or affixed to the land actually or in effect (which can include an object which rests on the land under its own weight without mechanical or similar fixings - again this will be a question of fact and degree);
  • The objective purpose of the object or installation in question should be considered. If the installation is intended to enhance the value and utility of the premises as a whole, that will be a strong indicator that it "forms part of the land";
  • A system being installed should be considered as a whole rather than in its component parts;
  • Just because something is installed in a building or structure does not mean that it necessarily becomes a fixture or part of the land;
  • Fixing an object with screws and bolts to or within a building or structure is a strong pointer to the object being "part of the land" and;
  • Parties should consider the ease (or otherwise) of removability of the object or installation in question. The fact that the object or installation cannot be removed without destroying or seriously damaging it or the area to which it is attached would indicate that it has become "part of the land".

As a result, and on the facts, Mr Justice Akenhead found that the installation of the conveyor system was a "construction operation". He distinguished the case on the facts from Gibson Lea Retail Interiors v Makro Service Wholesalers Ltd [2001] (which also considered the question of what "forming part of the land" meant) on the basis that this installation was not anything like the shop-fitting work in that case, which, although fitted with screws and bolts, could be moved "as goods come and go and the seasons change".

In coming to this decision, reference was also made to the specific exclusions from the definition of "construction operations" set out in the Act.

Exclusions

Section 105(2) excludes the following from the definition of "construction operations":

  • Drilling for/extraction of oil or natural gas, and extraction of minerals;
  • Assembly, installation or demolition of plant, machinery (or steelwork 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;
  • The making, installation and repair of artistic works; and
  • The manufacture or delivery to site of building or engineering components, equipment, materials, plant or machinery, or components for heating, lighting, air conditioning, ventilation, power supply, drainage, sanitation, water supply, fire protection, security or communication systems except under a contract which also provides for their installation.

It was this final exclusion which was influential in Savoye, as it makes clear that the provision of plant and machinery can be considered to be a "construction operation", as long as the contract provides for installation and not simply manufacture or delivery.

It is worth noting that Section 104(5) of the Act states that where a contract relates in part to construction operations and in part to other unrelated matters, the Act will only apply to those parts of the contract that relate to construction operations.

Residential occupiers are also excluded from the remit of the Act.

What this means for contracting parties

Contracting parties need to be alert to the reach of the Act in circumstances that they might not typically consider to be "construction".

As demonstrated in Savoye, it is not just contracts for the initial construction of a building or structure that may be caught by the Act, but also potentially those for major installations in that building. Contracts for cleaning in connection with construction activities, and painting and decorating, may also be caught by the provisions. Parties need to consider, on the facts, whether their contract is likely to fall within the Act's remit, and if there is uncertainty, take advice.

Where there is a "construction contract", parties cannot contract out of the fundamental principles of the Act. However, with early recognition that the Act may apply, parties can take the opportunity to agree provisions in their contracts which both comply with the Act, and which suit them both, rather than having the implied terms of the Scheme imposed upon them.

At the very least, parties (in particular employers) can avoid being caught unaware of implied payment provisions and notice requirements, default under which could result in the contractor suspending works, or liability for interest accruing on overdue amounts.


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