Download The Power/Process Plant exemption to the

Article for Building Magazine – The Power/Process Plant exemption to the Construction Act
Ian Yule Construction Partner, Weightmans LLP
As the debate rumbles on over the proposed Hinkley C power station project, it is worth reflecting that, if the project goes
ahead, many of the resulting construction contracts will not be governed by the Construction Act. They will fall within the
“power/process plant exemption” set out in section 105 of the Act. Anyone that can bring their contract within the
exemption - and generally it is the paying party that benefits - need not worry about such things as payment notices or
adjudication.
What contracts are exempt? First, the “primary activity” on the site must fall within one of the following categories: nuclear
processing, power generation, water/effluent treatment; or the production or processing of chemicals, pharmaceuticals,
oil, gas, steel, food or drink. Note that it is not just power stations that are covered.
Second, the contract must be for the assembly, installation or demolition of plant or machinery (or associated steelwork).
That second test was aimed at contracts for the supply and installation of large items of kit such as conveyors, burners
and turbines. Specialists who carried out that sort of work were thought not to need the Act’s protection. Meanwhile
traditional building and engineering contracts were covered by the Act, as at any other site.
It is quite possible to have a situation under which the main contract is largely within the Act, but a sub-contract (for
example, for the supply and installation of a turbine) is outside the Act. That can be a headache for a main contractor who
is trying to make things “back to back” so far as possible.
But it gets worse. It is also quite clear that an individual contract can be partly in and partly out of the Act (a “hybrid”
contract, as it is called). So if, for example, an EPC (engineer-procure-construct) contractor at a power station takes on
building and civil engineering works, together with an obligation to instal a large item such as a conveyor (which it intends
to subcontract) it could adjudicate any claims so far as they relate to the building elements, but not so far as they relate to
the conveyor. The potential for mayhem is obvious.
Looking at this unhappy situation, one may ask: what was the purpose of the exemption in the first place? The answer is
that in 1996 when the Act was passed, it was felt that certain industries did not need a payment and adjudication regime
because they were capable of regulating themselves. As one speaker in the House of Lords put it, the power and process
industries “do not suffer from the litigation and claims-oriented attitude which beset the building and civil engineering
industries”.
That may have been true in 1996, but it does not seem to be the case now - as indicated by the number of reported cases
involving process plants. A recent example is Severfield (UK) Ltd v Duro Felguera UK Ltd, heard in the Technology and
Construction Court at the end of last year. Severfield were engaged by the contractor, Duro Felguera, to supply and erect
steel structures. It was accepted by both parties in court that the contract was a “hybrid contract” of the type described
above.
The court found that this inevitably led to two separate payment and dispute resolution regimes, something that the
parties presumably did not intend. The first regime was the one that was drafted, but that only covered the works relating
to the plant and machinery. The second regime was imposed by the Act, and covered the other works. As the judge said:
“If the contract is a hybrid contract, because it includes for both included and excluded operations, the inevitable
result is a muddle.”
The judge noted that two reasons had been given in 1996 for excluding the power and process industries. The first was
that adjudication was seen as “punishment” which those industries did not deserve to have inflicted on them. The second
was that, so it was said, those industries had managed their own affairs well in the past. Both assumptions, said the judge,
were misconceived. In particular, adjudication had turned out to be a blessing, not a punishment, for the construction
industry.
The idea of having contracts that are half in and half out of the Act is an absurdity. If and when Parliament reviews the Act,
as it last did in 2011, this issue will surely be high on its list.
This article featured in Building Magazine, April 2016. For more information about this update, please contact Ian Yule,
Partner, Construction and Engineering Team at [email protected].