As the United Kingdom economy continues to transition to net zero, we are seeing increased activity levels in the renewable energy and energy transition sector, particularly within the onshore and offshore wind sub-sectors, despite mounting development costs. It has recently been reported that BP is planning two offshore wind energy projects in British waters despite government subsidies not being available, a first for the sector. The government are also planning to loosen planning restrictions on onshore wind farms in England: this is likely to create even greater interest in undertaking projects in this space.
For these renewable energy and energy transition projects generally, parties negotiating the relevant contracts should be aware that the applicability of the Housing Grants, Construction and Regeneration Act 1996 (the Act), which has shaped the way that construction projects have been procured and disputes have been managed since its introduction, will need to be considered. Traditional energy projects such as for the extraction of oil and gas are clearly excluded from the Act's ambit. However, it is not as clear whether all aspects of energy transition projects are excluded from the Act. Such projects are not expressly excluded by the terms of the Act, whether by deliberate choice by the draughtsmen at the time, or simply because certain energy technology did not exist at the time of drafting.
Construction Act: Background
The Act applies to "construction contracts" which are broadly defined by reference to "construction operations". These "construction contracts" include most contracts for the undertaking of construction or engineering works, including design or consultancy agreements. Any "construction contract" must contain certain elements which, if not included, are implied into the relevant contract by the Scheme for Construction Contracts (England and Wales) Regulations 1998 (the Scheme). Key elements include operation of payment provisions and the requirement that a party may refer a dispute under the contract to adjudication "at any time".
Whether or not renewable energy sector contracts are "construction contracts" varies from contract to contract, in particular in relation to the respective scope of the contract, as the Act contains specific exclusions to the definition of "construction operations".
Offshore exclusion
It is generally considered that offshore energy projects (eg offshore wind farms) are not caught by the Act, as any "construction operation" must form "part of the land". Under Staveley Industries plc v Oldbrecht Oil & Gas Services Ltd [2001] 2 WLUK 792, the court ruled that structures founded in the seabed below the low water mark do not form part of the land. It also found that there had been a Parliamentary intention to exclude any offshore installations from the Act's ambit.
Power generation exclusion
The most relevant exclusion for the energy sector is as follows:
“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… power generation …”
The typically cited interpretation of this exclusion was given in North Midland Construction plc v AE&E Lentjes UK Ltd [2009] EWHC 1371 (TCC) (North Midland). This states that a narrow approach is required, the intention being not to exclude from the scope of the Act the construction and engineering work performed at the site, but only those activities concerning "plant and machinery" and supporting steelwork. The court also clarified that "plant and machinery" meant the relevant components, items or plant rather than the whole industrial plant.
What does that mean?
This interpretation means that for many onshore renewable energy projects, certain elements of the relevant works will be excluded. For instance, for onshore wind energy projects, the installation of the turbines themselves under a supply agreement are likely to be excluded from the definition of "construction operations". However, there may also be elements of the relevant works that are not excluded, particularly as the boundaries of the Act's application and exclusions are not always well defined. If, for instance, the contractor's scope under the above supply agreement also included enabling works and/or construction of the turbine's foundations, these elements are likely to constitute "construction operations".
On a practical level, this can lead to a situation where a part of the works within a renewable energy project contract is governed by the Act (thereby making such contract a "construction contract), whereas another is excluded. This is known as an hybrid contract. In the case of Severfield v Duro Felguera [2015] EWHC 3352 (TCC) (Severfield), the court described hybrid contracts as "uncommercial, unsatisfactory and a recipe for confusion" but "the inevitable result of Parliament's desire to exclude what would otherwise have been obvious construction operations from the ambit of the … Act".
Where parties are unaware that their contracts are hybrid, case law has highlighted the difficulties that can arise, particularly around payment regimes and dispute resolution. For instance, in:
- North Midland, the relevant hybrid contract made no provision for adjudication as required under the Act. The court held that the Act's default adjudication rules under the Scheme therefore applied to the relevant contract at least in relation to those parts of the works governed by the Act, meaning that the parties had no say in, for instance, which adjudication nominating body was to be used
- Severfield, the relevant hybrid contract contained non-Act compliant payment provisions. The court's reaction to this was to uphold the contractual payment regime only in relation to works excluded from the Act's scope, with those works not excluded being subject to a separate payment regime required under the Scheme that was less favourable to the relevant developer
- Cleveland Bridge v Whessoe-Volker [2010] EWHC 1076 (TCC), a similar situation arose as with North Midland. Where a dispute arose, it was determined that the relevant adjudicator only had jurisdiction to hear the dispute that was relevant to the part of the works caught by the Act, leading to increased costs for the relevant parties.
Where scenarios similar to the above occur, this may have a significant knock-on effect not just on the relevant contract itself but the project generally.
What should be considered?
It is not always clear whether the Act applies to a construction or engineering contract, particularly in the renewable energy sector. What is clear, though, is that those involved with the negotiation of contracts for works within that sector need to be familiar with the Act’s operation and to draft their contracts accordingly.
First, parties should take a view at the earliest possible stage as to whether or not the contract (or elements of the scope of the contract) are excluded from the Act or not. That decision will dictate whether or not it is in the parties' interests to draft Act compliant terms.
Second, if the parties decide the Act does apply (to at least part of the contract), there are two key areas in particular that should be addressed, payment and dispute resolution. Where the relevant contract is a hybrid contract, it may be in the parties' interests to have one single payment and dispute resolution regime that is compliant with the Act rather than splitting those regimes between works that are compliant and non-compliant.
This approach was endorsed in relation to payment in C Spencer v MW High Tech Projects [2020] EWCA Civ 331, under which the payment structure in the contract was upheld for both construction operations and the non-construction operations covered by the hybrid contract. When drafting Act compliant payment provisions, the parties should consider the Act's requirements on payment instalments and other elements such as pay less notices.
When drafting Act compliant adjudication provisions, the parties should consider inserting agreed adjudication provisions that define the adjudication nominating body and allow the adjudicator jurisdiction to hear all disputes, whether relating to a "construction operation" or not. This will guard against the potential of parallel dispute resolution procedures or jurisdictional challenges.
