Is your contract a hybrid contract under the Housing Grants, Construction and Regeneration Act & Why Do You Need To Know?

Section 104(5) of the Housing Grants, Construction and Regeneration Act 1996 (“Construction Act”) provides that ‘where an agreement relates to construction operations and other matters, this Part applies to it only so far as it relates to construction operations.’ 

An important consequence of this is that you may have a contract for services or works which are partly construction operations and partly not so that the Construction Act implies terms into the contract in respect of the construction operations being supplied but not in respect of the non-construction operations.

The biggest danger is that your contract is not compliant with the Construction Act and that terms are implied into it in respect of the construction operations of which you are unaware. For example, this could lead to a paying party being unable to challenge the amount of an invoice until it has been paid, through lack of awareness of the requirements of the Construction Act.

So what are construction operations? These are widely defined and include construction or maintenance works to structures which will form part of the land, excavation, landscaping and painting of buildings and structures to name just some. There are some specific exceptions which the Construction Act doesn’t apply to.  The exception which most commonly leads to hybrid contracts is 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.

So in these cases 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 will not be caught by the Construction Act but any other construction operations such as erecting a building, maintenance or groundworks will be caught even where the primary activity at the site is one of the excluded activities.

It’s important to know whether you are a party or intended party to a hybrid contract because, if you are, the contract needs to be compliant with the Construction Act, at least in relation to the construction operations being carried out. The main provisions which will apply to construction operations (whether written in the contract or not) are a right to stage or periodic payments and a requirement for the paying party to serve certain payment notices in respect of each payment due failing which they have to pay the sum applied for (at least temporarily) even if it isn’t due on an analysis of the true value. This can be costly for the paying party especially in circumstances where the payee subsequently becomes insolvent.

Practical points for the parties to a hybrid contract to consider include:

1. Whether to apply for and invoice charges for the construction operation services and other services separately.
2. The need for the paying party to serve payment notices and/or payless notices, at least in respect of the construction operations element of the contract sum, and where these notices apply to both construction operations and non-construction operations, the possibility for the paying party to identify sums being paid broken down between construction operations and non construction operations in the notice.
3. The right of the parties to refer a dispute under the contract to adjudication for a fast track enforceable decision, but only in respect of the construction operations element unless the parties have expressly agreed to adjudication applying more widely.
4. The right of the payee to suspend performance of the whole or part of the construction operations for non-payment on 7 days written notice unless the parties have expressly extended this right to apply to the non-construction operations element.

In conclusion, as one Judge commented: a payment scheme that complies with, or mirrors, the statutory scheme for construction operations in respect of both construction and non-construction operations is a pragmatic solution to the illogical and uncommercial impact of the Act creating hybrid contracts.