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24 August 2020
A recent TCC decision has considered whether Energy from Waste plants fall within the power generation exemption in section 105 of the Housing Grants, Construction and Regeneration Act 1998 (the "Construction Act"). Such plants have a dual purpose of disposing of waste and producing energy, but section 105 requires a court to determine the "primary activity" on such a site. In determining that the primary activity in this case was power generation, the court emphasised the absence of any significant waste treatment operations and the fact that the financial and performance criteria for the plant were based upon energy production rather than waste throughput.
The Construction Act applies to contracts for "construction operations" carried out within the United Kingdom, save for certain classes of contract excluded by regulation and a narrow set of exemptions provided by section 105, which include the "assembly, installation or demolition of plant or machinery … on a site where the primary activity is … power generation", as well as other engineering projects such as nuclear processing and sewage treatment plants.
The exemptions in section 105 have in the past been narrowly construed. As the court noted in ABB Power Construction Ltd v Norwest Holst Engineering Ltd: "drilling for oil and gas is excluded but drilling for water (even if it is ultimately to be treated) is not; a project for tunnelling to lay a sewer (even if it is going to a sewage works) or to construct a railway has to be regulated but not a project requiring a tunnel for minerals; installing plant for nuclear processing, and power generation, or for water and effluent treatment is excluded but not plant for an incinerator".
The exemptions are also narrow in that they do not exempt entire projects, but only those activities concerning plant, machinery or supporting steelwork. This results in construction contracts which are only partly subject to the Construction Act – known as "hybrid contracts".
MW High Tech was contracted to design, manufacture, supply and install a fluidised bed gasification plant capable of processing fuel derived from residual domestic and commercial waste (i.e. after the removal of recyclables and organic material). MW High Tech subcontracted the installation of the gasification plant to Fabricom. Payment disputes arose which Fabricom referred to adjudication and subsequently received decisions in its favour.
The statutory right to adjudicate conferred by the Construction Act applies only to construction contracts. The subcontract contained a contractual right to adjudicate also, but "only to the extent (if any) required by the [Act]". If the subcontract works were not "construction operations" under the Construction Act, therefore, no right to adjudicate, statutory or contractual, would exist.
MW High Tech argued that the primary activity on the site was power generation (and not waste treatment as Fabricom contended) and that the subcontract was not for "construction operations".
The court conducted a detailed factual analysis to reach its conclusion as to the primary activity on the site, considering a variety of factors, including regulatory and planning issues, operations on site, the contract terms and investment sources for the plant.
Ultimately, the court held that the primary activity was power generation for the following reasons:
Accordingly, there was no statutory or contractual right to adjudicate and Fabricom's claim for enforcement of the adjudication decisions was dismissed.
This case once more highlights the difficulties attending the exemption provisions of the Construction Act, which continue to attract criticism from the judiciary. The judge in this case lent her support to these criticisms noting that there was a "powerful argument" for legislative reform. During Parliamentary debates over the Construction Act, it was suggested (by Lord Howie of Troon) that the then Government had been "got at by some big, powerful, important interests in what are called the process industries. They yielded to those pressures and in so doing lost sight of the aim of the Bill." A recent consultation on amending the Construction Act unsurprisingly received suggestions that section 105 be reviewed. It remains to be seen whether the consultation will be taken forward into legislative reform by the present Government and, if so, whether the interest groups which led to the current version of section 105 will lobby against reform.
The court's findings will, nevertheless, provide substantial guidance for those negotiating contracts for the construction of Energy from Waste plants. Whilst each case will turn on its own facts, those plants which receive waste material as fuel and do not carry out significant waste treatment operations are likely to fall within the power generation exemption, especially where the financial and performance criteria for the plant are directed toward energy production rather than waste throughput.
The applicability of the exemption can be a mixed blessing, as a hybrid contract is usually the result. The difficulties posed by hybrid contracts will usually make it advisable for parties to include Construction Act compliant provisions governing the whole of the works wherever there is potential for the exemption to apply. For a more detailed overview of hybrid contracts and the complexities they give rise to, please see our Law-Nows here and here.
ABB Power Construction Ltd v Norwest Holst Engineering Ltd  EWHC 68 (TCC).
Engie Fabricom (UK) Ltd v MW High Tech Projects UK Ltd  EWHC 1626 (TCC).
For further information on this topic please contact Tim Atwood, Karen Arch, Matthew Taylor or James Snape at CMS Cameron McKenna Nabarro Olswang LLP London by telephone (+44 20 7367 3000) or email (email@example.com, firstname.lastname@example.org, email@example.com or firstname.lastname@example.org). The CMS Cameron McKenna Nabarro Olswang LLP website can be accessed at cms.law.
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