HGCR Act 1996 - The Meaning of Construction Operation© Daniel Atkinson 2001 29 September 2001 Revised 20 January 2002
SUMMARYThe term “construction operation” is defined in the Act. Although commonly thought to exclude all construction related to the process industry, this is not the case.The intention of the Act was to cover most of the construction industry but to exclude some parts. The difficulty has been in identifying the exact scope of the Act since the terms adopted in the Act to describe construction are not precisely defined.It is necessary to consider on an item-by-item basis whether a contract relates to "construction operations" under Section 105.1 Construction IndustryThe term “construction operation” is defined in the Act. Although commonly thought to exclude all construction related to the process industry, this is not the case. There are three passages from Lord Lucas, the minister leading for the Government during the relevant debates in the House of Lords, referred to in the decision in Palmers Limited v ABB Power Construction Limited (1999) TCC: “ To reiterate and summarise our position, it is not, and never has been, our intention to exclude from the Bill all construction work on a process engineering site. We wish to exclude work only on plant and machinery. Ordinary civil and building work would not be excluded.” “....since it is only work on plant, machinery and connected steelwork that will be excluded from the Bill.....” “....[w]e undertook to amend Clause 104(2)(c) [now section 105(2)(c)] to achieve two particular effects. The first of these was to ensure that the exclusion of work on plant and machinery on a process plant site should extend only to steelwork that was necessarily connected to it in some way, and that all other steelwork on such a site - in common with all other construction work - should be subject to the Bill’s provisions.” The intention of the legislature was to cover most of the construction industry but to exclude some parts. The difficulty has been in identifying the exact scope of the Act since the terms adopted in the Act to describe construction are not precisely defined. 2 Section 104(5)Section 104(5) provides that where an agreement relates to construction operations and other matters, then Part II of the Act applies only to the construction operations. The Act therefore defines “construction contracts” in terms of an agreement with a person for “construction operations”. The definition is wide enough to cover all normal building and civil engineering activities including construction, management contracting and professional services. It is however necessary to examine the meaning of “construction operations” which limits the extent of the Act. 3 Section 105he scope of the Act is defined and limited by the definition of “construction operations”. Section 104(1) restricts construction contracts to those agreements for the carrying out of construction operations. The only related services which are caught are those in Section 104(2). Section 105(1) gives a descriptive list (a) - (f) of activities and provides that operations of any of these descriptions are “construction operations”. The list is extensive and covers new work and refurbishment, and includes preparatory works such as site clearance, scaffolding and access works as well as painting and decorating. Sub-section 105(1)(a) describes construction, alteration, repair, maintenance, extension, demolition or dismantling of buildings or structures forming or to form part of the land whether permanent or not. Subsection 105(1)(b) describes the same activities in relation to any works forming, or to form part of the land and provides a wide ranging list. This list includes roadwork, powerlines, aircraft runways, docks and harbours, railways, inland waterways, pipelines and industrial plant and installation for land drainage and coastal protection or defence. Section 105(1)(b) refers to “...including...industrial plant and installations for purposes of land drainage, coast protection or defence.” It is suggested that each item on the list of works is separate and that “installations for purpose of land drainage, coast protection or defence” is a separate category. “Industrial plant” is a separate category. The general description is “any works forming, or to form, part of the land” and the list is not meant to be restrictive on this general category. Section 105(1)(c) refers to installations in any buildings structure forming part of the land and H&V, lighting, air conditioning, drainage, security or communication systems. Section 105(1)(d) refers to external and internal cleaning of buildings or structures carried out in the course of their construction etc. Section 105(1)(e) includes preparatory and access works. It specifically refers to “erection, maintenance or dismantling of scaffolding.” It also refers to “tunnelling and boring”. Section 105(2) defines those operations which are not construction operations under Part II as sub-sections (a) - (e). These are as follows:
Section 105(2)(c) specifically excludes work associated with plant or machinery or associated steelwork. It appears that “plant” here has a different meaning to “plant” at Section 105(1)(b). Section 105(2)(c) only applies where the site primary activity relates to processing. There is no indication of the meaning of “site”. It is suggested that the activity referred to is the projected activity of the particular facility. Section 105(2)(c) excludes activities related only to plant or machinery, namely the M/E and process parts, on power and process plants but not the civil or building elements. It is possible by reason of Section 104(5) that in such projects the Act may apply to only the civil or building operations and not the M/E or process operations. Section 105(2)(d) expressly excludes from the Act, supply and delivery only contracts. This may give some concern to specialist contractors, where major components are fabricated off site. Section 105(2)(d) is meant to exclude off site manufacturing or deliver contracts, except as part of design and build contracts. The provisions of the Act can therefore be avoided by subdivision of contracts. Note that the list under Section 105(2)d(iii) of components is the same as Section 105(1)(c). The clear intention is to exclude manufacture and supply contracts for installation works. All of the above leads to categorisation of sites and the assessment of the construction operation as well as the true nature of the contract. PRACTICE NOTEIt is necessary to consider on an item-by-item basis whether a contract related to "construction operations". The Act called on distinctions to be made on the basis of operational or engineering considerations and has to be read and construed on the basis that it was clear to laymen in the construction industry.4 CaselawEight cases usefully demonstrate the approach taken by the Courts in interpreting the meaning of "construction operation". Case 1. In Palmers Limited v ABB Power Construction Limited (Aug 1999) TCC the work involved the assembly and erection of a heat recovery steam generator (HRSG) boiler as part of a cogeneration plant to be used for power generation. It was held that "construction" had a wider connotation than the use in popular speech, when used in connection with many of the operations described in Section 105(1). "Structures forming part of the land" was intended to refer to all structures and works of whatever type. It was observed that the definition of works that formed part of the land was extensive and included power lines, telecommunications apparatus and industrial plant. It was held that it was clearly envisaged that the assembly and fixing to the land of industrial plant and similar features was included within the definition of both "construction operations" and "construction" in the Act. The fact that much of the boiler was assembled away from its permanent resting place then lifted into position did not affect the above interpretation. Much of industrial plant would be assembled and constructed in this way, but such work was expressly included in the definition of "construction operation". The nature, size and method of fixing of the steel structure and the boiler meant that once assembled the boiler formed part of the land. This interpretation is a common sense approach to the meaning of "forming part of the land" emphasising as it does the physical connection necessary either directly to land or a structure connected to land. It is therefore difficult to envisage any construction works which will not form part of the land. The manufacture of vehicles, vessels or machines which travel on or in land, sea or air will clearly not be within the Act. Case 2. In Homer Burgess Limited v Chirex (Annan) Limited (1999) Crt of Session the recognised that a contract might in part relate to "construction operations" under Section 105 and in part not, and that Section 104(5) was the solution for such mixed contracts. It was held that it was necessary to consider on an item-by-item basis whether a contract related to "construction operations". It was held that the word "plant" had to be given its ordinary meaning. It was held that the word "plant" was not ambiguous, but had indeed been defined in a number of cases which pre-dated the Act. It was held that the word "plant" included the pipework forming links between various pieces of machinery or equipment by which ingredients and pharmaceuticals in process or manufacture were conveyed from one stage of the manufacturing process to another. Without such pipework, the individual pieces of machinery or equipment would be unable to operate. It was held that the installation of pipework was an operation which fell within the scope of the exception in Section 105(2)(c)(ii) and was not a construction operation. The structural steelwork supporting or providing access to plant or machinery was not plant by means of which the operation of the site owner were carried out, but part of the structure or setting out within which the operations were carried out. There was separate exclusion of such steelwork from the definition of construction operations. Case 3. In Nottingham Community Housing Association Limited v Powerminster Limited (30 June 2000) it was decided that Section 105(1)(a) did not distinguish between the various parts of a building, whether they are wall partitions or cladding panels for instance or the various systems listed in Section 105(1)(c). They were all vital parts of the building and in the case of the systems their proper function was necessary to make the building fit for habitation. Once the systems were installed they became part of the construction of the building. It was held that Parliament cannot have intended that the Act would apply only to the installation of such systems, and not their alteration, extension, demolition or dismantling. It was difficult to see any rational basis for the work of a heating or mechanical contractor carrying out substantial alterations to the heating or air-conditioning system of a large building, or the dismantling or demolition in all units on a large housing estate, to be outside the ambit of the Act. If it was unclear whether heating systems installed in a building were included in Section 105(1)(a) then it would be clear that Parliament intended such systems to be governed exclusively by Section 105(1)(c). The argument that an interpretation which made Section 105(1)(c) redundant was wrong, was rejected. An argument for redundancy seldom carried any weight. Case 4. In ABB Power Construction Ltd v Norwest Holst Engineering Ltd (2000) TCC it was held that Section 105(2) when compared with section 105(l) showed that it was the intention of Parliament that exemption should be given by applying an additional and different test: was the object of the "construction operation" to further the activities described in section 105(2)(c) (and in paragraphs (a) and (b)) since in those industries or commercial activities it was not thought necessary that at any level there need be a right to adjudicate or to payment as provided by the Act. Sub-section 105(1) provided conventional descriptions of various kinds of work or services and paragraph (d) of sub- section 105(2) did the same. In contrast the remainder of the sub-section, whilst outlining an operation, qualifies it by reference to the ultimate purpose for which the operation is required:
In addition paragraph (c) makes explicit the need to identify the site or location of the activity and to ensure that it is the primary or dominant activity since the activities listed may be ancillary to the principal activity. Judge Lloyd stated it would be invidious if the regime applied to some but not all construction contracts on a site or for a project. The object of Section 105(2) was that all the construction operations necessary to achieve the aims or purposes of the owner or of the principal contractors (as described in it) would be exempt. If this approach was correct then an interpretation should be given to section 105(2) which would further and not thwart the objective. It was held that the installation of insulation performed a plant-like function since without insulation the pipework, boilers etc would not function as they are designed to perform, nor could the plant be operated safely and efficiently. Any work that would be a construction operation within section 105(l) which was necessary for the full and proper assembly or installation of plant so that it would fulfil the purpose or purposes for which it is intended was exempt by reason of section 105(2)(c) (assuming that the condition relating to the site is also satisfied). It would not make any sense if, for example, a sub-contractor providing paint systems or cathodic protection systems necessary to protect plant against erosion or corrosion, to take two instances, were not exempt whereas only the basic installation (whatever that might mean) of the plant itself were exempt. The Act has to be applied by people within the construction industry. It should be read and construed on the assumption that the answer was clear to a layman. The Act called for distinctions which were based on operational or engineering considerations. Plant and machinery could readily be distinguished from factory roads, administrative offices etc; steelwork was exempt only if required for the purposes of supporting or providing access to plant or machinery. Accordingly the installation fell within the Section 105(2)(c) exception. The next issue was the "temporal point". It was held that the Act was concerned with work which would be carried out. Section 105(l)(a) and (b) explicitly refer to the construction of buildings or structures "forming, or to form, part of the land ... ". Even allowing for some of the exclusions and inclusions in section 105, when the overt purposes of the Act is taken into account, there could be no logic in permitting a major sub-contractor to require sub-sub-contractors to accept a "pay when paid" provision simply because the work is to do with an extension to an existing production plant or factory whereas no such exemption applies if the work is for an entirely new scheme. It was held that in any event even if it was wrong that section 105(2)(c) applied as much to the future as to the present, the installation work was taking place on a site where the primary activity was power generation. The facts that a fence has been erected and that for operational reasons one side was designated as a Construction Site was irrelevant. Even if the fence was not required for reasons of health and safety or under the CDM regulations, it denotes no more than the customary separation of the "live" side. For the purposes of section 105(2)(c) there was only one site. Case 5. In ABB Zantingh Limited v Zedal Building Services Limited (2000) TCC the issue was how the term "primary activity" in Section 105(2)(c)(i) was to be determined. It was held that one cannot make sense of the Act by a minute analysis of the work to see what was plant and what was not. One must look at the nature of the work broadly. Adjudication cannot be divided in its jurisdiction between minute parts of a sub-contractor's work. Judge Bowsher looked at the work overall, and regardless of any disputes about the ambit or nature of that work, decided that that Zedal were employed to install plant. The exception provided by section 105(2)(d) itself suggests that cables, cable trays and cable ladders may become plant when installed. The manufacture and delivery to site of such items for power supply were excepted from the operation of the Act "except under a contract which also provides for their installation". He held that in conformity with the decisions in Homer Burgess v. Chirex and ABB Power v.Norwest Holst (paragraph 15) and for the reasons there stated, that the materials used by Zedal became plant. It was held that when Parliament referred in section 105(2) to "a site where the primary activity is..." the reference must be to a place broader than a generator surrounded by a security fence. To make any sense of the Act, one had to look to the nature of the whole site and ask what is the primary purpose of the whole site. Is the primary purpose power generation, or, in this case, printing? It was held in this case that the work did not fall within any exception provided by Section 105(2) of the Act and the declaration requested by ABB was refused and the action dismissed. Case 6. In Mitsui Babcock Energy Services Ltd v Foster Wheeler Energia OY (2001) the approach taken by Judge Lloyd in ABB Power Construction Limited v Norwest Holst Engineering Limited was adopted. It was not relevant that a separate company was established to construct, own and operate the CHP plant or that the construction site was leased by the owners of the petrochemical complex to the owners and operators of the CHP plant. The exemption in section 105(2)(c) was directed to the primary activity on a site. The legislation is silent about the question of ownership or occupation of the site. It was held that the reasons for such silence were obvious when it was considered that a site, where the primary activity is the processing of chemicals, may involve separate processes by different companies each contributing to the primary activity of the processing of chemicals. The fact that each of these companies owns or occupies their own discrete area of the petrochemical site was irrelevant to the primarv activity on that site. It was held that in all the circumstances of this case, the operations undertaken by Mitsui were exempt operations within the meaning of section 105(2)(c)(ii) of the 1996 Act. Case 7. In Staveley Industries plc v Odebrecht Oil & Gas Services Ltd (28 February 2001) TCC it was held that the installation of equipment in steel modules, did not form part of the land when standing in the yard at Teesside. Judge Havery held that the language of Section 105(1)c) required the fittings to form part of the land at least prospectively, if not immediately upon their installation. The issue therefore was whether or not the modules were to form part of the land. Judge Havery held that it was perfectly clear that the Act did not extend to shipbuilding. If the platforms were to be floating platforms, the Act would certainly not apply. The distinction between a floating platform and a platform founded in the sea bed appeared to be irrelevant to any intention of Parliament, and any differential application of the Act arising out of it would appear to be accidental. Moreover, it was common ground that the provisions of section 105 (1) were derived from section 567(2) of the Income and Corporation Taxes Act 1988. The provision corresponding to section 105(l)(a) of the. Act was section 567(2)(a). Where section 567(2)(a) has "structures (whether permanent or not), including offshore installations" section 105(l)(a) has "structures forming, or to form, part of the land (whether permanent or not)". That suggested an intention to exclude offshore installations from the ambit of the Act, or at least the absence of any intention to include them. In the light of those considerations, Judge Havery held that structures which are, or are to be, founded in the sea bed below low water mark are not structures forming, or to form, part of the land. Case 8: The decision in Gibson Lea Retail Interiors Ltd -v- Makro Self Service Wholesalers Ltd (2001) TCC is important to shopfitting industry which may involve windows, doors and stairs but may also involve carpets and moveable units. His Honour Judge Richard Seymour QC held as a preliminary point that shopfitting did not amount to "construction operations" unless it was "construction…of…structures forming, or to form, part of the land (whether permanent or not)" under Section 105(1)(a) or "installation in any building or structure of fittings forming part of the land" under Section 105(1)(c). What might be involved in a structure or fittings "forming part of the land" was not addressed in the Act. Judge Seymour referred to the law of real property in which the concept of a fixture was well-established, and held that the definition of "construction operations" in section 105(1) of the Act above was directed to whether the particular structure or fittings would, when completed, amount to a fixture or fixtures. In the law of real property one of the factors which was relevant to a determination of whether a chattel attached to a building is a fixture or not is whether the attachment is intended to be permanent Billing v. Pill [1954] 1 QB 70. Makro submitted that the test of whether a chattel had become a fixture or not was in part the degree of annexation, but principally the purpose of any annexation which had taken place. If the purpose of any annexation was the better use or enjoyment of the chattel as a chattel it was not normally to be considered as a fixture. In the instant case Makro submitted that any fixing of gondolas to walls or floors was simply to keep units which could have been free-standing more stable. Judge Seymour held that the proper construction of section 105(1)(a) of the Act of the words "construction…of… structures forming ,or to form, part of the land (whether permanent or not)" was clear and not ambiguous. It was the structures which need not be permanent. The effect of referring to "forming, or to form, part of the land" was to import into section 105(1)(a) of the Act the concepts and tests of the law relating to fixtures. It was held in the instant case that none of the items supplied by Gibson Lea to Makro were, as and insofar as installed, fixtures. It followed that the works done by Gibson Lea for Makro were not "construction operations" and that the relevant contracts were not "construction contracts".
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