• JURISDICTION
• MEANING OF CONSTRUCTION OPERATION AND CONSTRUCTION CONTRACT
• NOTICE TO WITHHOLD PAYMENT

Technology and Construction Court

His Honour Judge Thornton QC

(Judgment delivered 6 August 1999)

The Claimant was engaged by the Defendant to undertake scaffolding services in connection with the Defendant’s own contract at the Esso Fawley Cogeneration Project. The Defendant’s work involved the assembly and erection of the heat recovery steam generator boiler. Scaffolding was being used by the Defendant to enable it to erect the boiler and associated pipe work at the project. Disputes arose between the Defendant and the Claimant. The Defendant alleged that the Claimant failed to provide an adequate number of appropriately qualified personnel leading to delays exposing the Defendant to liquidated damages for delay. The Defendant sought to set off such claims against sums due to the Claimant.

Following the Defendant’s purported set off and earlier non-payment of interim payments Palmers served a notice stating its intention to suspend performance and commence adjudication. No adjudication procedure was specified in the contract and accordingly the Scheme applied.

The Defendant contended that the scaffolding subcontract was not a "construction operation" nor a "construction contract" as defined by the HGCRA. The Claimant immediately issued a claim in the TCC seeking answers to certain questions of law.

Yes.

Yes.

The Defendant’s letters were not effective notices of an intention to withhold payment therefore the Claimant is entitled to immediate payment.

Yes, it is clearly appropriate for the Court to intervene since only when it has declared that the relevant contract is a construction contract will an effective adjudication be possible.

Construction operation

ABB argued that its boiler assembly work was not a construction operation as described in section 105(1). Much weight was placed on the views of Mr Billington in his witness statement where he stated:

ABB was not constructing anything and were definitely not constructing industrial plant. The height and size of the HRSG structure makes it clearly defined from the other areas of the Project. The HRSG is housed within a steel frame. The HRSG is not enclosed by a building.

ABB’s argument was that the process of erecting the steelwork and assembling and erecting the boiler and its associated pipework and ancillary materials cannot, in the light of this evidence, be described as the construction of any of the operations whose construction is described in section 105(1) as being a "construction operation". Moreover, the boiler, its supporting structures and associated pipework are not "works forming part of the land", "industrial plant" nor either "power supply" or "water supply" as described in sections 105(1)(b) or (c) of the HGCRA.

Mr Billington’s views as to whether a construction process is being carried out by ABB is not determinative of that question which is one of mixed law and fact. The ultimate conclusion as to whether the assembly process involved is to be considered as "construction" is a question of law. Although, in popular speech, the word "construction" is usually used in connection with building operations as opposed to engineering operations, the word clearly has a wider connotation when used in connection with many of the operations described in section 105(1). Thus, structures and works forming part of the land (which are not confined to buildings but are clearly intended to refer to all structures and works of whatever type) are linked with this word. Moreover, power-lines, telecommunications apparatus and industrial plant are expressly included within the definition of "works" forming part of the land. Thus, it is clearly envisaged that the assembly and fixing to the land of industrial plant and similar features are included within the definition of construction operations and are also included in the definition of "construction".

The nature, size and method of fixing into position of the steel structure and the boiler itself clearly have the consequence that the boiler forms part of the land once assembled and fixed into position. Indeed, it would be hard to conceive a more rigid and permanent structure than the steelwork in question. The fact that much of the boiler is assembled on the site but away from its permanent resting place and then lifted into position cannot affect the conclusion that a construction activity is involved. Since much industrial plant will be assembled and erected in this way and since such plant is expressly included in the definition of a construction operation, the only reasonable conclusion is that ABB’s work is a construction operation.

In considering the somewhat convoluted section 105 of the HGCRA, it is helpful first to notice one of its most important features. This is that there are some operations which fall within the definition, provided by section 105(1), and would therefore appear to be construction operations and yet are not such operations as a result of section 105(2) of the Act. This is because subsection 105(1) states, somewhat inelegantly, that subsection (1) applies "subject as follows" which, in its context, means that subsection (1) is to apply unless subsection (2) also applies. If subsection (2) applies, subsection (1) is not to apply. The inapplicability of subsection 105(1) arises in any particular case even though most, if not all, of the relevant operations described in subsection (2) also fall within one of the descriptions of relevant operations set out in subsection (1).

The question as to whether Palmers’ scaffolding work comes within subsection 105(2) and, in consequence, falls outside the ambit of subsection 105(1) arises because of the wording of subsection 105(1)(e) which includes the phrase: "scaffolding [which] is preparatory to such operations as are previously described in this subsection" (emphasis added). Since ABB’s work is, as I have already found, encompassed by subsection 105(1)(b), it might be thought that there was no question but that the scaffolding work was preparatory to one of the operations "previously described". However, the operation of assembling and erecting the HRSG boiler by ABB also clearly falls within the ambit subsection 105(2)(c) since the boiler is for use on a site whose primary activity is power generation. Both parties accepted that ABB’s sub-sub-contract work for Stork falls outside Part II of the Act since it falls within the exclusions provided for in subsection 105(2) and is not, in consequence, a construction operation.

The structure of section 105 led ABB to argue that "previously described in this subsection" is a reference to those operations previously described which are not, additionally, included in subsection (2) since, so it was argued, such operations are not "previously described in this subsection". Instead, they are operations which are subsequently described in subsection (2).

The meaning of the critical phrase "such operations as are previously described in this subsection" is not wholly free from ambiguity. The phrase could be referring to any operation which falls within the description provided by the words set out in section 105(1) even if the operation is taken outside the ambit of subsection (1) by subsection (2) or it could be referring only to those operations that are also construction operations. In order to determine which of these two possible meanings the words are intended to convey, it is first necessary to examine the statutory context in which they appear.

Section 105 is contained within Part II of the HGCRA which introduces a statutory adjudication scheme, to be operated in conditions of speed, that is linked to a statutory limitation on a paying party’s power to impose set-offs on a receiving party. It also renders ineffective the operation of pay-when-paid provisions in construction contracts which are situated below the main contract in a contractual chain. These measures are intended to speed up cash flow and to curb the prevalence of unnecessary and unfair set-offs being imposed on sub-contractors and on contracting parties even lower down the contractual chain.

However, it is generally known that a limited number of contracting organisations representing specific sections of the construction and engineering industry persuaded the Government to exclude the contracts of their members from the ambit of the HGCRA. This was because these sections of the construction and engineering industry were already operating satisfactory contractual arrangements concerned with payment. This is the explanation for section 105(2) of the Act.

The principal operations which would, or might, be construction operations had they not been taken out of the ambit of Part II of the Act are: drilling; mineral extraction and associated work; the assembly of power generation plant and its associated steelwork; the manufacture of building materials, and the making of artistic works.

Not all processes involved in the construction or erection of power generation plant are excluded from the ambit of subsection 105(1) by subsection 105(2). Clearly the erection of supporting steelwork is excluded. However, the construction of buildings and concrete foundations for use with the plant in question do not come within the exclusion provided by subsection 105(2) nor does any painting of the internal or external surfaces of that plant.

Thus, it is perfectly possible, and within the statutory scheme, for a contractor’s operations to fall outside the definition of a construction operation yet for a sub-contractor providing building, foundation or painting services for that contractor’s work to come within the definition. This means that some sub-contractors are able to seek an adjudication and rely on the HGCRA’s statutory restrictions on a contractor’s power of set-off whereas the same contractor is not able to seek adjudication under the relevant main contract next up the contractual chain nor to require the employer to use the HGCRA set-off procedures. This consideration counters ABB’s argument that it would be unfortunate and contrary to the statutory scheme if ABB could be the subject of a set-off imposed by Stork and could not require an adjudication of any dispute with Stork as to the validity of that set-off whereas ABB might be unable to levy the same set-off against Palmers, because of the operation of Part II of the HGCRA, and could be the subject of an adjudication about that set-off at the behest of Palmers, despite Palmers being below ABB in the contractual chain.

This background to the Act shows that the language of the subsections in question need not, where two different meanings of the subsections are possible, necessarily suggest a meaning which leads to a contractor being treated in the same way vis-à-vis his employer as a sub-contractor is to be treated by that contractor.

I now turn to the language of subsections 105(1) and (2). The more natural of the two possible meanings of the relevant words suggests that sub-subsection 105(1)(e) is not incorporating the exclusions provided by subsection 105(2). If the words had been intended to exclude from subsection 105(1)(e) preparatory operations for those operations which, although apparently within the ambit of subsection 105(1), are not to be treated as being so because they are also within the definition of excluded construction operations that are set in subsection 105(2), it would have been a more natural use of language to use these words: "such construction operations as are previously defined by this subsection" rather than words actually used: "such operations as are previously described in this subsection". By widening the relevant reference from: "construction operations" to: "operations" and by referring to operations that are: "described in this subsection" rather than to operations that are: "defined by this subsection", the draftsman of the HGCRA appears to be pointing to operations which fit the words of subsection (1) even if they fall outside its ambit by virtue of subsection (2). In other words, scaffolding which is preparatory to an excluded construction operation may, nonetheless, itself be a construction operation.

Thus, the apparent meaning of the words in question, given their context and natural meaning, is that Palmers’ operations are construction operations and that its sub-sub-sub-contract is a construction contract…

Thus, whether by the process of contextual interpretation, by the application of the natural meaning of the words in question or by recourse to the intention of the promoters of the Act as expressed in Parliamentary debate, Palmers is entitled by the provisions of the HGCRA to call for a statutory adjudication of the dispute as to payment of the claimed sums since the scaffolding work being undertaken is a construction operation and the sub-sub-sub-contract with ABB is a construction contract.

This leaves the question of whether the whole of ABB’s activities are construction operations or whether at least some of them are not, thereby requiring the statutory blue pencil exercise to be performed with regard to Palmers’ work that is provided for by section 104(5) of the Act. If only some of ABB’s work falls within the description of construction operations, only the scaffolding services provided for that part of ABB’s work could qualify as construction operations. In view of the broad definition of what is involved in a construction operation however, it is clear that all the activities that are being performed by ABB fall within that description and that there is no scope for a blue pencil exercise.

Palmers’ entitlement to be paid £172,572.25

On any view, the sum of £172,572.25 should have been paid by 10 July 1999. ABB’s intimations of a set-off were made by letters of 5 and 8 July 1999. However, the provisions of section 111 of the HGCRA must be complied with if those letters are to entitle a set-off to be asserted by ABB. These read:

"111(1) A party to a construction contract may not withhold payment after the final date for payment of a sum due under the contract unless he has given an effective notice to withhold payment …

1. To be effective such a notice must specify -

1. the amount proposed to be withheld and the ground for withholding payment, or
2. if there is more than one ground, each ground and the amount attributable to it,

           and must be given not later than the prescribed period before the final date for payment."

The notices served by ABB cannot constitute effective notices since neither identifies any amount which it is proposed will be withheld. Thus, since the final date for payment has now passed and since no effective notice of withholding may now be served, the sum of £172,572.25 is now due and owing to Palmers and may not now be the subject of any set-off by ABB.

Palmers applied at the hearing for permissions to amend so as to add a claim for this monetary sum and a claim for judgment for this sum. I declined this application. However, I indicated that I would give Palmers liberty to apply so that if, following a period of 14 days from the hearing on 5 August 1999, the money had not been paid, Palmers can forthwith apply to the court for permission to amend and, at the same time, for immediate judgment for that sum. It is doubtful whether ABB would have any basis for resisting those applications if Palmers, in fact, had to make them.

The court has a discretion as to whether to grant or withhold a declaration, even if it is declaring a party’s legal rights. Here, it might well be considered that since the HGCRA provides a statutory adjudication scheme that covers all disputes, it is more appropriate to allow the adjudicator to deal with these disputes first before any consideration is given to them by the court.

However, the adjudication scheme provided for by Part II of the HGCRA can only apply to disputes arising under a construction contract. Here, the principal dispute is one of jurisdiction, being one as to whether there is in being such a contract at all. It is clearly appropriate for the court to intervene since only when it has declared that the relevant contract is a construction contract will an effective adjudication be possible. This is particularly so given that there is no statutory power given to an adjudicator, if appointed, to resolve disputes about his jurisdiction.

Since the parties are entitled to have resolved the dispute as to whether an adjudicator may be appointed and as to the potential jurisdiction of the adjudicator and since the dispute as to Palmers’ entitlement to payment gives rise, in effect, to a short point of law arising out of a suggested section 111 notice, it is appropriate to deal with that dispute as well even though an adjudicator would have the power and jurisdiction to have it referred to him.