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Streamlining the process: Exemptions to payment and adjudication legislation

Process plant contracts have historically been exempt to the Housing Grants, Construction and Regeneration Act 1996 - but the justification for this looks increasingly flimsy as time has gone on.

The construction industry is used by now to the payment and adjudication regime introduced by the Housing Grants, Construction and Regeneration Act 1996.

However, there is one particular type of construction contract to which it does not apply.

These are contracts for “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, or the production, transmission, processing or bulk storage (other than warehousing) of chemicals, pharmaceuticals, oil, gas, steel or food and drink” (process plant contracts for short).

The justification given for this at the time the legislation was debated was that the process engineering industry has not had the same dispute and payment problems as the construction industry as a whole.

However, over the years there have been enough cases regarding the exemption to call into question this assumption.

Typically these cases have involved a challenge to the enforcement of an adjudicator’s decision in relation to a process plant contract that might or might not fall within the exemption.

Why would such cases be brought if the process plant sector did not suffer from the same dispute and payment problems as the rest of the construction industry?

No clear division

The courts have struggled to find a clear dividing line between contracts that fall within the exemption and those that fall outside.

Take, for example, a contract for the construction of a farm-based anaerobic digestion plant.

It might be thought that because it involves the production of gas it falls within the exemption.

“Over the years there have been enough cases regarding the process plant exemption to call into question this assumption”

But does the fact that the farm has some other primary activity such as livestock production mean that the exemption does not apply?

Or is the ‘site’ limited to the area within the farm where the plant is situated?

And why should any of this matter? It makes no difference to the underlying dispute and payment issues.

Recent cases

In Conor Engineering Limited v Les Constructions Industrielles de la Méditerranée (CNIM) SA [2004], the court decided that a subcontract for the installation of boiler works forming part of an energy-from-waste plant fell outside the exemption.

The reason given was that the primary activity of the site was the incineration of waste, rather than the generation of power.

In the most recent case, Severfield (UK) Limited v Duro Felguera UK Limited [2015], the court had to consider a contract for the design, supply and erection of steel structures in connection with a power generation project, some of which formed an integral part of the plant and the rest of which did not.

“The idea of the process plant industry as a non-adversarial oasis, even if it were true in 1996, hardly holds good today”

The court, somewhat reluctantly, followed earlier cases in treating this as a “hybrid” contract, meaning that there were two different payment regimes, depending on which category the relevant works fell into.

In such a case determining which regime applies to a given payment is likely to be far from straightforward.

As the judge commented: “Although I find that uncommercial, unsatisfactory and a recipe for confusion, it is the inevitable result of Parliament’s desire to exclude what would otherwise have been obvious construction operations from the ambit of the 1996 Act”.

A contract which, as is often the case, includes “civils works” could likewise be treated as a hybrid contract.

Process claims

It is hardly surprising that the process plant exemption has been the subject of much criticism, and it is likely that at some point it will be removed from the legislation.

The idea of the process plant industry as a non-adversarial oasis, even if it were true in 1996, hardly holds good today, when contractual procedures and risk allocations are increasingly contested.

In the meantime, contractors working on process plant projects would be well advised to seek to ensure that the contract includes payment and dispute provisions that comply with the Act, even where the exemption is believed to apply.

Alan Erwin is a partner at Fladgate

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