Hybrid construction contracts - payment notices

Summary

Payment notices for hybrid construction contracts do not need to separately identify the sums owing for ‘construction operations’, together with the basis of the breakdown, in order to be valid: C Spencer Ltd v M W High Tech Projects UK Limited.

Background

Hybrid construction contracts are those which include both construction operations covered by the Housing Grants, Construction and Regeneration Act 1996 (the Act) and non-construction operations.

The Act has been of great assistance to the construction industry by providing clear and certain provisions in respect of payment applications and the dispute resolution procedure, which has in turn improved cash flow. However, the Act is not as comprehensive as some might have hoped. The use of ‘hybrid contracts’, i.e. those which include both construction operations (as defined by s.104 of the Act) and non-construction operations (not covered by the Act), has resulted in uncertainty.

The dispute between M W High Tech Projects UK Limited (MW) and C Spencer Ltd (CSL) arose out of this uncertainty.

MW was engaged as the main contractor to design and construct a fuel from waste power plant. CSL was subcontracted to design and construct the civil, structural and architectural works. The subcontract included both construction operations and non-construction operations.

The payment provisions set out in the Subcontract broadly reflected those within the Act. CSL was required to request interim payments upon the completion of each stage of the works. When issuing the interim payment applications, CSL did not distinguish between the claims for construction operations and non-construction operations. Similarly, MW did not did not distinguish between construction operations and non-construction operations in its payment notice.

A dispute arose, and at both first instance and appeal the court found that a valid payment notice does not have to identify separately the sum due in respect of construction operations only. The principal issue boiled down to a relatively straightforward point of statutory and contractual interpretation. CSL argued that the words of s.104(5) “only so far as it relates to construction operations” had to be read into every section of the Act, whilst MW argued there was no need to read this into the Act and to do so would be unnecessary and would result in confusion, complexity and additional cost. MW’s arguments prevailed.

Minimum provisions only

The Act identifies certain provisions that are to be incorporated into construction contracts as a minimum. It does not require (and nor did the subcontract in this case require), either party to differentiate in their payment or payless notices between the sums attributable to construction and non-construction operations. As the subcontract complied with the Act, it would not subsequently impact the rights and obligations of the parties – this is ultimately governed by their contractual terms.

No need for separate notifications in hybrid contracts

On appeal, the court considered whether the terms of the subcontract contravened the minimum requirements. The Act, in s.104(5), anticipated the prospect of hybrid contracts, given the distinction between construction and non-construction operations, but did not provide that a hybrid contract had to contain a term requiring the separate notification and breakdown of sums due in respect of construction operations only.

No need to “read in”

It was not necessary or appropriate to read the words "only in so far as it relates to construction operations" from s.104(5) into all the later sections of the Act. CSL tried to rely on S&T (UK) Limited v Grove Developments Limited [2018] EWCA Civ 2448 to argue that s.111 overrode any conflicting contractual provisions and were the principal source of the obligation to pay the notified sum, even if the contract said the same thing. The Court of Appeal felt that the former is entirely conventional, but the latter was not. The result in Grove would have been different had the right identified been expressed as contractual and not a statutory right.

Having created hybrid contracts by virtue of s.104 and s.105, the Act had to be taken to have had them in mind in subsequent provisions. Section 104(5) made plain that if parties had a hybrid contract, they could not contract out of the Act in respect of construction operations; it did not prevent the parties from contracting in. It would therefore be contrary to s.104(5) to use it to restrict the parties' rights and liabilities. There was a need for a distinct allocation between construction and non-construction provisions at the stage of a referral to adjudication, but not before.

Comparison with the adjudication provision

The importance of the difference between construction and non-construction operations under a hybrid contract only arises if there is a dispute as to the sum due – this was considered in the case of Cleveland Bridge UK Ltd v Whessoe-Volker Stevin Joint Venture [2010] EWHC 1076 (TCC). However, where sums are notified in respect of the works as a whole and subsequently paid, then the distinction between construction and non-construction operations is inconsequential.

The adjudication provisions in the subcontract had been narrowed by the parties so that they only related to construction operations – thus recognising that the subcontract was a hybrid contract. The same limitation was not included in the payment provisions of the subcontract. By implication, the parties were content to rely on the payment provisions derived from the Act in respect of both construction and non-construction operations. There was a critical difference between the payment and adjudication provisions in the subcontract that supported MW’s position.

Conclusion

This case highlights that in the case of hybrid contracts, the Act does not require payment notices to separately identify the sum due in respect of construction operations. Although this distinction in hybrid contracts only arises if there is a dispute as to the sum due, clients should bear this requirement in mind when drafting the provisions in hybrid contracts, in order to provide certainty should future disputes arise.