Hybrid construction contracts are those that include both construction operations covered by the Housing Grants, Construction and Regeneration Act 1996 (the Act) and non-construction operations. Is it, therefore, obligatory that hybrid contracts include distinct notifications with separate breakdowns for each type of operation?
This is an important question and one that was considered in the case of C Spencer Limited -v- M W High Tech Projects UK Limited [2020] EWCA Civ 331. In this case, the uncertainty stemmed from the fact that 'construction operations' are covered under the Act while 'non-construction operations' are not. It was a question of whether the wording of section 104(5) of the Act, 'only so far as it relates to construction operations', should be written into the provisions of a contract relating to payment.
The case between CSL and MW involved a hybrid subcontract for the provision of construction operations in the form of engineering works and non-construction works such as the erection of steelwork for plant and machinery. Upon a dispute arising as to an interim payment, it was proposed that the dispute be settled by way of an adjudication. MW challenged this method and argued that the adjudicator could only decide on issues in respect of construction operations, rather than non-construction operations.
The adjudication claim was withdrawn and instead MW issued an application for interim payment that distinguished the construction operations from non-construction operations, but MW's responding payment notice did not make this distinction.
CSL issued proceedings in the Technology and Construction Court (TCC) in 2019 for payment of £2.6 million. The TCC held that MW's payment notice was valid as the payment provisions in the subcontract reflected the Act and therefore construction operations and non-construction operations did not need to be distinguished in the payment notice.
The case was subsequently appealed.
Upholding the decision, the Court of Appeal found that there was only a need for a distinct allocation between construction and non-construction provisions where a dispute arose, i.e. at the point of a referral to adjudication. This was based on the premise that the adjudication provisions in the subcontract had been narrowed to include only construction related operations, whereas the payment provisions within the subcontract did not contain these limitations. The Court of Appeal held that the Act expressly recognised the existence of hybrid contracts and therefore if the Act would have intended for payment provisions under hybrid contracts to clearly provide a distinction between construction and non-construction operations, it would have done so.
In light of this decision, it is now clear that payment notices under a hybrid contract do not need to identify sums separately in relation to construction operations under the Act, and non-construction operations not under the Act, in order to be valid.
While this case addresses the point about payment notices, the wider issue to consider when negotiating hybrid contracts is the need to understand the issue of payment and how it is to be managed for both construction and non-construction operations and what recourse is available for non-payment. To have different forums for payment disputes because of the existence of construction and non-construction operations within one contract is unhelpful to both parties and is arguably better addressed at the outset. Having all works subject to the Act, irrespective of whether they are all caught by the Act, would make it clearer for all parties, but more so the contractor.
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