Construction Contracts – the extent of the exception for power generation

In the recent case of Engie Fabricom v MW High Tech Projects [2019] the Court has considered the exception under 105(2)(c) of the Housing Grants Construction and Regeneration Act 1996 as amended (the “Act”). 

In Engie Fabricom the Claimant was the sub-contractor of the Defendant who was engaged by the employer as the main contractor to construct a fluidised bed gasification power plant at Cleveland Street (a type of waste incineration plant). The Claimant was engaged by the Defendant under a Subcontract which was based upon the IChemE Subcontract (the Yellow Book) 4th edition 2013 to construct a fluidised bed gasification power plant at Cleveland Street, Kingston upon Hull. The project was known as Energy Works Hull. The Claimant was subcontracted for a large proportion of the main contract works including the design, engineering, manufacture, delivery to site, construction, execution and completion of the gasification plant system. The standard form of Subcontract had been amended to state that Adjudication only applied to the extent (if any) required by the Act.

The Claimant commenced Adjudication proceedings in relation to unpaid sums which resulted in a decision being issued on 11 April 2019 which required the Defendant to pay the Claimant the sum of £27,062.25, together with the Adjudicator’s appointment fee and the Adjudicator’s fees and expenses. The Defendant failed to pay the sums due and as a result, the Claimant issued and served Part 7 proceedings together with an application for summary judgment to enforce the Adjudicator’s decision.

Section 105 of the Act sets out what falls within the meaning of ‘Construction Operations’ and specifies certain exemptions. One such exemption relates to the assembly, installation or demolition of plant or machinery (or erection or demolition of steelwork for supporting or providing access to plant or machinery) on a site where the primary activity is power generation.

The Defendant argued during the enforcement hearing that the primary activity at Energy Works Hull was power generation and as a result, the works were excluded from the ambit of the Act and accordingly, there was no legal right or entitlement to adjudicate. The Defendant advanced a number of arguments including:

• It was necessary to look at the nature and purpose of the whole site and not just the area in which the Claimant’s operations were performed and here the primary purpose was for power generation.
• The plant was a purpose built independent power station with its location selected due to its proximity to the National Grid substation.
• Electricity is generated for export to the National Grid, not simply or principally for the purposes of powering activities on the site itself.
• The nature of power generation activity is gasification not incineration. It is a process which converts refined fuels into combustible gas which is then combusted to generate electricity.
• The Claimant described the project itself as a “£200m Energy Works EfW Plant…which will power up to 43,000 homes”.
• Within the planning documents, approval was obtained in Hull for ‘energy works to produce sustainable energy through gasification’.
• The large percentage area of the site occupied by power generating plant/machinery compared with other plants - the Defendant relied upon the absence of shared activity and averred that power generation is intrinsically linked to all plant on site.
• That the purpose and objects of the company for whose benefit the works are executed on site for and the financial model of the site should be taken into account, particularly given that the owner of the site described itself as having ‘production of electricity’ as the nature of its business on Companies House.

After advancing the above points, the Defendant argued that the Adjudicator’s decision was without jurisdiction and unenforceable.

In reply the Claimant argued that the primary activity on the site was the disposal and thermal treatment (by incineration/gasification) of waste and that power generation was merely a secondary activity. In Conor Engineering Limited v Les Constructions Industrielles Mediterranee SA [2004] BLR 212, such a distinction had been successfully argued given the sheer volume of waste dealt with at the site compared to the energy generation.

The Judge, Mr Davis QC held that (a) the wording of both the main EPC and the Subcontract was consistent with power generation and (b) that the Defendant had a real prospect of succeeding in its defence that the primary activity was power generation which is excluded from the scope of the Act and therefore the Adjudicator did not have jurisdiction. Whilst the Court did not make a determination that the primary purpose was indeed power generation as this was not a Part 8 claim for a declaration, the Defendant had referred to further evidence that would be provided in proceedings regarding power generation agreements and fuel supply contracts which along with the submissions noted above, persuaded Mr Davis QC that there was a real prospect the Defendant would succeed in full proceedings and power generation would be held to be the primary purpose.

As a result the Court refused the Claimant’s application for summary judgment but accepted the Defendant’s offer to pay the entire sum claimed into Court.

Practical implications of the decision

The case illustrates that the exclusions in the Act are not as clear cut as you may first consider them to be and with new and emerging technologies within the waste and energy sectors, the Act requires more careful and detailed consideration to determine if it applies.

For more information on this article please contact Lianne Edwards from the Construction & Infrastructure Team.