The Nature of Construction Contracts
A variety of factors make a construction contract different from most other types of contracts. These include the length of the project, its complexity and its size, and the fact that the price agreed and the amount of work done may change as it proceeds. As a result, the allocation of these risks is a very important part of the contract since these factors always result in additional costs being incurred. This inevitably raises the question of who should pay or bear these extra costs.
The structure may be a new building on virgin ground. It may involve the demolition of an existing building and its full reconstruction. It could involve partial demolition and rebuilding, or the refurbishment and extension of an existing building or structure. This may be mostly below ground (in which case it is engineering) or above ground (in which case it is building). Building, however, includes foundations and other underground works. A building contract can consist of activities and services carried out both above and below ground level.
The term ‘construction contract’ or ‘construction law’ is used throughout this book. The term includes contracts for building works as well as engineering contracts. Chitty on Contracts
introduced for the first time in 1999 a chapter on the subject in its 28th edition (see ch. 37). Architects traditionally design and administer building contracts. The Architects Registration Board (ARB, see www.arb.org.uk
) now regulates its academic and practical training. Consulting civil engineers design civil engineering works and administer their construction. A large engineering contract usually makes provision for administration and supervision by site-based resident engineers. Modern contracts also provide for the appointment of project managers to coordinate and administer the contract.
What is a construction contract?
In Modern Engineering (Bristol) Ltd v. Gilbert-Ash Northern  AC 689, Lord Diplock at 717B described a building contract as:
an entire contract for the sale of goods and work and labour for a lump sum price payable by instalments as the goods are delivered and the work done. Decisions have to be made from time to time about such essential matters as the making of variation orders, the expenditure of provisional and prime cost sums and extension of time for the carrying out of the work under the contract.
It is important to realise that Lord Diplock was referring to a contract made using a standard form of building contract. Such contracts usually make provision for interim payments at regular intervals as the work proceeds, whereas a contract
that is described as entire is a product of the common law. It may make provision for stage payments, but in essence, it requires the contractor to complete all its work before any entitlement to payment arises. A modern example of such an entire contract is Discain Project Services Ltd
v. Opecprime Developments Ltd
 EWHC Technology 450. The carrying out and completion of this contract (whether made using a standard form contract or entire) differs from other manufacturing processes. HHJ Newey OR in Emson Eastern
v. EME Developments
(1991) 55 BLR 114 described the differences at p. 125, within the context of practical completion of the work:
I think the most important background fact which I should keep in mind is that building construction is not like the manufacture of goods in a factory. The size of the project, site conditions, the use of many materials and the employment of various kinds of operatives make it virtually impossible to achieve the same degree of perfection that a manufacturer can. It must be a rare new building in which every screw and every brush of paint is absolutely correct.
There is no special body of rules that applies to such contracts, whether they are described as building, engineering or construction contracts. Lord Reid said in Modern Engineering that where the parties enter into detailed building contracts there were ‘no overriding rules or principles covering their contractual relationships beyond those which generally apply’. This principle was supported by Lord Lloyd of Berwick in Beaufort Developments (NI) Ltd v. Gilbert-Ash (NI) Ltd  UKHL  1 AC 191, where he stated that:
Standard forms of building contracts have often been criticised by the courts for being unnecessary obscure and verbose. But in fairness one should add that it is sometimes the courts themselves who have added to the difficulty by treating building contracts as if they were subject to special rules of their own.
The fact that the ordinary rules of the law of contract apply is subject to an important qualification. The legislation passed following the recommendations of the Latham Report (Constructing the Team, 1994) treated construction contracts as a special category requiring statutory intervention. The introduction of Housing Grants Construction and Regeneration Act 1996, part II (hereafter HGCRA 96), and its amendment by the Local Democracy, Economic Development and Construction Act 2009 part 8 have altered fundamentally the allocation of risks in construction contracts. The amended Act became law on 1 October 2011. All parties before entering into contracts have to consider how they will deal with the legislation. It also provides a much wider definition of what, for the purposes of the legislation, is a construction contract and what is included in the phrase ‘construction operations’.
Section 104(1) of the HGCRA 96 states that a ‘construction contract’ includes:
• the carrying out of construction operations
• arranging for the carrying out of construction operations by others, whether under a subcontract to him or otherwise
• providing his own labour, or the labour of others, for carrying out construction operations.
Section 104(2) extends the definition of a construction contract to any agreement to carry out architectural, design or surveying work; or the provision of advice on building, engineering, interior or exterior decoration; or the laying out of landscape. Note that a contract of employment is specifically excluded from the statutory definition. This definition is much wider than that given by Lord Diplock above. It includes the carrying out of design activities and the giving of advice, so widening the range of activities covered by the legislation. Construction operations are further defined by section 105 as including:
• all normal building and civil engineering works, including operations such as scaffolding, site clearance and painting and decorating as well as contracts for repair and maintenance
• consultants agreements on construction operations
• labour-only contracts
• contracts of any value.
Certain contracts are excluded from the operation of the Act: see section 105(2). The reason for this is that they did not suffer from the same ills identified by the Latham Report. The petrochemical and process industries are excluded, and so are contracts concerning the supply and fixing of plant (including supporting steelwork). These activities are not classified as ‘construction operations’. The off-site manufacture of components to be incorporated into the construction work is also excluded, as are contracts with residential occupiers (see section 106). There is, however, a substantial body of case law resulting from contracts with residential occupiers. These involve either the use of standard forms of contracts or other contracts that make specific provision for adjudication. This is discussed further in Chapter 16
. In a number of cases the meaning of construction operations has been considered. Homer Burgess Ltd
v. Chirex (Annan)
 BLR 124 held that pipework was part of a pharmaceutical plant and not a construction operation. By contrast, in Palmer Ltd
v. ABB Power Construction
(1999) BLR 426, the subcontractor work was held to come into the definition. This was so despite the main contract work being outside the definition. Staveley Industries Plc
v. Odebrecht Oil & Gas Services
(2001) 98 (10) LSG 46 held that structures on the sea bed below low water mark are not part of the United Kingdom for the application of the Act.
Problems with ‘Construction Operations’
A basic rule in the law of property is that things attached to the land become part of the land. One question then is does section 105(1)(a) ‘[the] construction, alteration, repair, maintenance, extension, demolition or dismantling of buildings, or structures forming, or to form, part of the land
(whether permanent or not)’ import the law on fixtures into the Act? HHJ Seymour in Gibson Lea Retail Interiors Ltd
v. Makro Service Wholesalers Ltd
 BLR 407 thought it did so. In that case he found that the work carried out by the contractor did not attach to the land and was not a construction operation. Coulson J in Savoye and Savoye Ltd
v. Spicers Ltd
 EWHC 4195 (TCC) was not convinced that Parliament had done so. He comprehensively reviewed the law on chattels and fixtures. The contract was to design, supply, supervise and commission a new conveyor system at the site of an existing factory. On a reference to adjudication the employer
claimed the contract was not for construction operations under section 105 and the adjudicator had no jurisdiction. The adjudicator disagreed and awarded the contractor the value of its invoices as the client had not served withholding (pay less) notices. After a detailed review of the authorities, the judge concluded that it was a construction operation. It fell into the section as the structure was attached to the land and not purely a chattel (i.e., a product). Edwards-Stuart J applied Savoye and Savoye
in Fahstone Ltd
v. Biesse Group UK Ltd
 EWHC 3650 (TCC). The case involved the supply and installation of a computer numerically controlled woodworking machine used to manufacture windows and similar items. A number of defects with both the machine and the software resulted in adjudication. In the enforcement proceedings the supplier argued that the work was not a construction contract. The judge visited the site to see how the machine had been fixed as the parties were in conflict over how easily it could be removed. After review he concluded that there was a triable case as it was not permanently fixed to the floor, and gave the supplier leave to defend the action.
It is not only fixtures that create uncertainty. Constructing a power station requires substantial civil engineering operations to make it possible. It is quite difficult for contracting parties to differentiate between the two activities and to know when it is a ‘construction operations’ and when it is not. Coulson J in Severfield thought it was a ‘muddle’ which was inherent in the original proposals to exempt certain activities from the adjudication [paras 16, 22 and 62]. The issue in Severfield (UK) Ltd v. Duro Felguera UK Ltd  EWHC 3352 (TCC) was the application of the Act to the building of power generating stations. Earlier in Severfield (UK) Ltd v. Duro Felguera UK Ltd  EWHC 2975 (TCC), Stuart-Smith J refused to enforce an adjudicator’s award. He decided that part of the works fell within the exception in section 105(2)(c) of the HGCRA 96 as amended, and it was not appropriate to sever the adjudicator’s decision and enforce those parts that fell outside the exception. Following that decision the contractor sought summary judgment of the value of its work having stripped out the sums that were outside the act. The contract was for the design, supply and erection of steel structures on a project which consisted of the construction of two power generation plants, each one consisting of a number of different structures. Coulson J decided that this was a ‘hybrid’ contract—part of the work was subject to the HGCRA 96 as amended and others were not (the power generating part). The parties made provisions for payment but were unaware that there was such a distinction in the proposed contract. Section 105(2)(c)(i) provides that the following operations are not construction operations:
[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
(i) nuclear processing, power generation or water or effluent treatment or … [emphasis added]
Coulson J at para 17 referred to the two most recent decisions on the difficulties created by steelwork in connection with power generating plants. Ramsey J in North Midland Construction PLC
v. AE and E Lentjes UK Ltd
 EWHC 1371 (TCC) reviewed all of the authorities and concluded that a narrow
construction was appropriate for section 105(2). He said that
on that basis, the intention of the legislation was to exclude steelwork which formed an integral part of the machinery and which was directly and necessarily connected to the plant. Other steelwork would come within construction operations to which the Act applied. In the second case, Cleveland Bridge (UK) Ltd
v. Whessoe-Volker Stevin Joint Venture
 EWHC 1076 (TCC), he ruled that it was only the actual ‘erection’ of steelwork which supported or provided access to plant and machinery which was excluded. All other aspects of the work were within the scope of the 1996 Act.
At para 21 in Severfield Coulson J said: ‘… the relevant works were being carried out on a site where the primary activity was power generation’. The question to be decided was whether the enabling works and the civil works came within the description of 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? The answer to this question matters because, depending on the answer, there may be two different payment regimes applicable. In North Midland the judge concluded the enabling works were construction operations and the HGCRA 96 applied. Cleveland Bridge held that substantial works were excluded and the adjudicator had exceeded her jurisdiction. Neither case dealt with what payment regime applied. In this case there were two regimes, the statutory one and the contractual one. To take advantage of the statutory rules the application for payment had to be clear and certain, and in this case it was not. This case is discussed furthe...