The main provisions of the HGCR Act Part II are as follows:

Section 108: Adjudication

Section 109 Payment

Section 110

Section 111: Withholding Payment - Set off.

Section 112: Suspension for non-payment.

Section 113: Pay when Paid.

Each of the above sections apply only to "Construction Contracts", so it is necessary to examine the meaning of this defined term which is to be found in Section 104 of the Act Part II. In addition there are further restrictions on the operation of the Act which need to be considered.

Section 104(7) provides that Part II of the Act applies whether or not the law of England and Wales or Scotland is otherwise the applicable law in relation to the contract.

Section 148 defines the geographical extent of the Act and this makes clear that Part II extends to England, Wales and Scotland, but not to Northern Ireland.

Section 150 provides for the commencement of the various Parts of the Act. Section 150(3) provides that "other provisions of the Act" which includes Part II come into force on a day appointed by order of the Secretary of State, which is 1 May 1998 for Part II.

Section 104(1)

Section 104(1) of the Act defines a "construction contract" as an agreement

(a) to carry out construction operations;

(b) arranging for the carrying out construction operations by others under a subcontract or otherwise;

(c) providing one's own labour or the labour of others for the carrying out of construction operations.

Agreement/Contract

It is clear from Section 104(1) that "construction contract" is an "agreement" with a person. However "agreement" is only one of the essential ingredients of an enforceable contract, the other being consideration and an intention to create legal relations. It is possible therefore that there may be an agreement for the purposes of the Act but not for the purposes of a contract. A letter of intent for instance may be acted upon and constitute an agreement to carry out certain works, but may not give rise to a contract.

Is it intended that claims in restitution for quantum meruit, should be caught by the Act? If contracts are unenforceable due to uncertainty, does the Act still apply?

There are indications in the Act, that its provisions only apply to enforceable contracts. The term "construction contract" itself suggest this. Section 108(1) which refers to adjudication refers to "disputes under the contract" which to have any legal meaning must refer to contractual rights. Section 114(4) which refers to the Scheme for Construction Contracts, states that they have effect as "implied terms of the contract concerned", where there is a default of contractual provisions agreed by the parties. The assumption is that there is an enforceable contract, and this is the only practical meaning if implication of terms are to have any legal effect.

It is suggested therefore that "construction contract" means what it says -- that there must be an enforceable contract. The Act does not apply to:

• claims in restitution where there is no contract; and

• contracts unenforceable due to uncertainty.

This interpretation is given some weight by the decision in The Atlas Ceiling & Partition Co Ltd v Crowngate Estates (Cheltenham) Ltd (2000) TCC, where the date of entering into the agreement for the purposes of the Act was the not the date when the standard form was signed, but the later date when there was the intention to create legal relations.

Section 104(2)

Section 104(2) of the Act provides that a reference to a construction contract also includes agreements to do architectural, design or surveying work and to provide advice on building, engineering , interior or exterior decoration or the laying out of landscaping, in relation to construction operations.

Section 104(3)

Section 104(3) makes clear that a contract of employment as identified in the Employment Right's Act 1996 does not constitute a construction contract.

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.

Section 104(6)

Section 104(6) provides that Part II of the Act relates to construction contracts which

1. are entered into after commencement of the Part; and

2. relate to the carrying out of construction operations in England, Wales and Scotland.

Section 117 of the Act makes clear that Part II of the Act applies to a construction contract entered into by or on behalf of the Crown.

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.

One limitation is 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 etcetera.

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".

There was extensive discussion as well as lobbying by specialist contractors on exclusions from the list of activities comprising "construction operations". In particular the organisations representing the process plant industry argued that its industry did not have the extent of problems with disputes as the building and civil engineering sectors and in addition that sponsorship by the Government was DTI and not the DOE which was the lead department on the Bill. Subcontractors challenged the claim that the process sector was free of disputes and lobbied for the process sector to be included in the Bill.

Section 105(2) defines those operations which are not construction operations under Part II as sub-sections (a) - (e). These are as follows:

(a) drilling for, or extraction of, oil or natural gas

(b) extraction of minerals whether by underground or surface working, and tunnelling or boring, or construction of underground works, for this purpose.

(c) assembly, installation or demolition of plant or machinery, or erection or demolition of steelwork for the purpose of supporting or providing access to plant or machinery, on a site where the primary activity is

(i) nuclear processing, power generation or water or effluent treatment; or

(ii) process plant-chemicals, pharmaceuticals, oil, gas, steel or food or drink

(d) manufacture or delivery to site of

(i) building or engineering components or equipment;

(ii) materials, plant or machinery; or

(iii) components for systems - heating, lighting, air conditioning, ventilation, power supply, drainage, sanitation, water supply or fire protection - or components for security or communication systems except under a contract which also provides for their installation;

(e) making, installation and repair of artistic works which are wholly artistic in nature. (Sculptures, murals).

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). Note that 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. It is odd that steelwork which supports such plant or machinery is excluded but not say concrete structures fulfilling the same purpose.

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.

The first case on the meaning of "construction operations" is Palmers Limited v ABB Power Construction Limited (Aug 1999) TCC. ABB's 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. Part of this work included the erection of a structural steelwork frame to support and provide access to the boiler and associated pipework. Palmer's work was to provide temporary scaffolding around and above the structural frame to enable the erection of the boiler to take place, and to constantly adapt the scaffolding to facilitate the on-going erection works.

Palmer's work was not therefore the main operation, but an operation that either was preparatory to or for rendering complete ABB's work. If ABB's work was not a construction operation then the scaffolding work could not be a construction operation under Section 105(1)(e). It was argued that erecting steelwork and assembling and erecting the boiler and associated pipework was not a "construction operation" under Section 105(1) since it was not covered by any of the statutory descriptions. 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.

It was then argued that ABB's work was excluded by Section 105(2)(c) and therefore not a "construction operation" and that in consequence Palmer's work could not be a "construction operation". This was not accepted. It was common ground that ABB's work was excluded by Section 105(2)(c). It was held that Section 105(1)(e) which referred to scaffolding made the ancillary works "construction operations" if they were ancillary to the operations described in Section 105(1). Some of the operations described in Section 105(1) were excluded from being "construction operations" by Section 105(2), but they were still operations for the purpose of Section 105(1)(e). Although this might lead to a contractor's main contract being outside the Act and his subcontract within the Act, such a possibility was already envisaged by other provisions of the Act and indeed by the debate in Parliament.

In Nottingham Community Housing Association Limited v Powerminster Limited (2000) TCC, it was held that 

There is no minimum value in the Act, and therefore it will apply to all construction contracts regardless of size. The inclusion of a value limit was rejected as it was considered this would create an opportunity for avoidance by breaking contracts down into small packages of work to fall outside the scope of the Act.

Section 106(1)(a) provides that Part II of the Act does not apply to a construction contract with a residential occupier. This is defined under Section 106(2) as a construction contract which principally relates to operations on a dwelling which one of the parties to the contract occupies or intends to occupy as their residence.

It would appear that the dwelling does not have to be the occupier's main residence although there must be an intention to occupy it at some time in the future. However a considerable amount of work carried out on domestic property will fall within the Act as it will be carried out for Local Authorities, Housing Associations, commercial landlords and managing agents.

Formalities -- Writing

Section 107(1) provides that the Act only applies where the construction contract is in writing. Any other agreement between the parties as to any matter is effective only if in writing. The requirement for agreements to be in writing reflects the importance of the rights created by the Act. Under Section 107(6) writing means recording by any means, which reflects modern developments.

Section 107(2) defines "agreement in writing".

Section 107(2)(a) is straight forward and includes agreements which are made in writing. Significantly an agreement does not need to be signed by the parties.

Section 107(2)(b) refers to agreements made by exchange of communication in writing, which is intended to deal with contracts made by written offer and acceptance.

Formalities -- Otherwise than in Writing

Section 107(2)(c) provides that an agreement is in writing if it is "evidenced in writing". Section 107(4) defines "evidenced in writing" as an agreement made otherwise than in writing, but recorded by one of the parties, or by a third party, with the authority of the parties to the agreement.

Section 107(3) deals with agreements which are not otherwise in writing but refer to terms which are in writing. This appears to refer to oral agreements which incorporate written forms of agreement. This would also cover agreement by conduct, as when the offer is made in writing but acceptance is not by signing the acknowledgment form or by letter.

Section 107(2)(c) and Section 107(4) provide for authorised third parties to record the agreement, which of course would include an Adjudicator or Arbitrator during respective proceedings. It therefore allows the parties to record an oral agreement at any stage.

A formally executed contract document will therefore not be necessary for the contract to be covered by the Act, any contract formed on the basis of exchange of documents in a recordable form or an authorised recorded agreement will fall within the scope of the Act.

Section 107(5) is considered by some commentators as likely to cause unexpected problems to some parties to construction contracts. The clause states:-

"An exchange of written submissions in adjudication proceedings, or in arbitral or legal proceedings in which the existence of an agreement otherwise than in writing is alleged by one party against the other party and not denied by the other party in his response constitutes as between those parties an agreement in writing to the effect alleged."

This means that if the parties involved in an arbitration agree that they have an oral rather than a written contract, under the statute it has exactly the opposite effect, i.e. it is treated as a written agreement for the purpose of Part II of the Act because of the agreement by service of claims and defence. There will then be a right to adjudicate after legal proceedings have started.

Where both parties to a contract always intended it to be oral and not covered by the Act if a dispute is to arise between the parties which ends up in arbitration or litigation it will then be within the Act with the rights regarding payment, suspension and adjudication implied into the oral contract. This may well lead to uncertainty and an additional area of dispute.

Section 107(5) deals only with "written submissions" in the specified proceedings and therefore does not deal with (say) simple exchange of communications in which the issue is not denied. Note also that the other party must respond before this provisions comes into effect.

Section 115 of the Act does not apply to the service of documents for the purpose of legal proceedings which are governed by the rules of court. The section covers the service of any notice or any other document required or authorised to be served under Part II of the Act relating to construction contracts.

The parties to the contract are free to agree on the manner of service of any notice or any other document.

In the absence of any agreement between the parties a notice or other document may be served on a person by any effective means. It shall be treated as effectively served if it is addressed, prepaid and delivered by post to the addressee's last known principal residence, or in the case of a person carrying on a trade or profession their last known principal business address, or in the event of a body corporate to the bodies registered or principal office. Notice or any document in this section includes any requirement for a form of communication in writing.

Periods of time shall be reckoned as follows:

where an Act is required to be done within a specified period after or from a specified date the period begins immediately after that date;

any period of time that includes Christmas Day, Good Friday or any other Bank Holiday, that day shall be excluded.

Therefore a 7-day period would include Saturdays and Sundays but exclude, for example, the August Bank Holiday Monday.