Most commercial construction contracts are subject to adjudication, even if the contract is silent on that issue.
But there are exceptions. One such exception is where the works being carried out are not “construction operations” as defined in section 105 of the Housing Grants, Construction and Regeneration Act 1996 as amended (“the Construction Act”).
Section 105 of the Construction Act excludes from the definition of construction operations, amongst other things, “assembly, installation or demolition of plant or machinery, or erection or demolition of steel work 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.”
When is a construction operation, not a construction operation?
This “primary activity” issue was the focus of the court's attention in the case of Engie Fabricom UK Ltd v MW High Tech Projects UK Ltd. In that case, MW was the main contractor for a fluidised bed gasification power plant, which involved the disposal of waste by power generation (a waste to energy project).
In this case the parties agreed that under their contract they had the right to adjudicate, “to the extent permitted by and consistent with the provisions of the Construction Act.”
Engie commenced an adjudication against MW for non-payment and won. It was awarded circa £27,000.
MW did not pay. So Engie commenced court proceedings, seeking to enforce the decision by way of summary judgment in the usual way.
MW said that the adjudicator did not have jurisdiction because there was no right to adjudicate. It said the works in question were not “construction operations” because the primary activity of the site was the generation of power. This was therefore caught by the exception at section 105 of the Construction Act.
By contrast, Engie said that the primary activity was not power generation, but rather the disposal and thermal treatment of waste by incineration. The generation of power from the disposal of that waste was a secondary activity. As a result, it said the adjudicator did have jurisdiction and so his decision should be enforced.
Bigger issues at stake
Both parties put forward detailed arguments before the court. They were each represented by Queen’s Counsel (QCs), as well as junior counsel, so it must be assumed that there were bigger issues at stake than just the sum of £27,000 awarded to Engie. It is likely that Engie had in mind subsequent adjudications.
There was not time to deal with both parties’ arguments at the half day court hearing, so they were given permission to make further submissions after the hearing.
In its further submission MW said the case was not suitable for summary judgment, that expert evidence may be required and that a full trial would be beneficial.
As confirmed by the judge by reference to the court rules, to defeat an application for summary judgment the defendant must show that it has a “real” prospect of success in defeating the claim. That is, not just a “fanciful” chance of success.
As the judge noted, because this was a summary judgment application by Engie, MW did not have to show that its arguments were correct, just that it had a “real” prospect of doing so.
Realistic prospect of success can defeat summary judgment enforcement of an adjudicator's decision
The judge found that MW did have a real prospect of being able to establish that the primary activity of the site was power generation, which if proved would mean that the adjudicator did not have jurisdiction, which would render his decision unenforceable. In addition, he said the court did not have all the evidence before it, and the parties had not had an adequate opportunity to address the issues.
As a further tactical move, MW offered to pay the entire sum claimed into court, pending the outcome of the court’s determination of the issue.
As a result of the above, the judge refused to grant summary judgment to Engie, on condition that MW paid the above sum into court.
Contract should have been clearer on adjudication
There are two main lessons to be learned from this case. First, the arguments and therefore the costs over whether the parties could adjudicate could have been avoided if this had been made clear in the contract.
Second, Engie may have been able to avoid this outcome if it had taken a different approach to enforcing the decision. Applying for summary judgment is the quickest approach, but the test for defeating an application for summary judgment carries with it risk for the claiming party. Had Engie instead taken the route of seeking a declaration from the court, such as whether the adjudicator had jurisdiction by reference to the primary activity of the site, it may have avoided this outcome.