Court of Appeal clarifies UK Construction Act treatment of hybrid contracts

The Court upheld an earlier ruling of the English and Welsh High Court, finding in favour of construction company MW High Tech Projects UK. The Court said a payment notice does not have to separately identify sums due and not due under the UK's Housing Grants Construction and Regeneration Act (Construction Act) in order to be valid.

Construction expert Lawrence Davies of Pinsent Masons, the law firm behind Out-Law, said deciding otherwise would have radically altered the way the construction industry operates.

“Where hybrid contracts are concerned, there is no need for separate or distinct notification and break down of sums due in respect of construction operations and non-construction operations. You can contract into the Act, you cannot contract out,” Davies said.

MW High Tech Projects was commissioned to design and construct a power plant capable of generating energy from processed waste. Sub-contractor C Spencer Limited (CSL) was engaged by MW to carry out civil, structural and architectural works, with the sub-contract valued at £35.7 million.

The majority of the sub-contracted works fell within the definition of ‘construction operations’ under the Construction Act. However some work, such as the erection of steelwork for plant and machinery, fell outside of the Act, meaning the contract was a hybrid contract.

Payments for CSL’s work were made on a milestone basis and payments for construction and non-construction work were not treated separately.

When a dispute arose over the sum due for an interim payment CSL said it would refer the issue to an adjudicator. MW challenged the proposed adjudication, saying the adjudicator could only deal with disputes in respect of construction operations and not disputes in respect of non-construction operations.

In light of this challenge CSL withdrew its adjudication claim and issued an application for interim payment which separated out construction and non-construction work. In response, MW issued a payment notice which did not break down construction work separately.

CSL issued court proceedings against MW seeking payment of £2.6m which it said was due for construction work. In the High Court the judge dismissed the claim and said MW’s payment notice was valid.

The Court of Appeal agreed, ruling that the time for separation and break down of sums as between construction and non-construction operations was at the time when a dispute was referred to adjudication. Davies said that contractors and sub-contractors might find it helpful to keep a record of what costs in each payment application and payment notice related to construction operations and what costs do not, so that any referral to adjudication is quick and easy.

The Court also said that the legislation expressly recognised that hybrid contracts will exist in the construction industry, and if it had intended hybrid contracts to contain a term requiring a distinct break down of sums due in respect of construction operations only, it would have stated this clearly.