What activities are excluded from the statutory adjudication process under s.105(2)(c) of the Housing Grants (Construction and Regeneration) Act 1996 – Equitix ESI CHP (Wrexham) Limited v Bester Generacion UK Limited

What activities are excluded from the statutory adjudication process under s.105(2)(c) of the Housing Grants (Construction and Regeneration) Act 1996 (‘the 1996 Act’)? On what basis does the court order a stay of execution against a victorious SPV claimant? The High Court (TCC) has recently issued guidance.

The case concerned a project to design and build the Wrexham Biomass Fired Energy Generating Plant (‘the Project’). The claimant was a special purpose vehicle created for the project, and the defendant was a contractor. The dispute was about validity of the Claimant’s termination and basis of claiming back substantial amounts.

Progress on the Project was slow, and eventually the Claimant issued a notice of adjudication seeking a declaration that the defendant was not entitled to an extension of time. The adjudicator agreed. The Claimant then terminated the contract, and notified the defendant that it had elected not to continue with the Project. The Claimant then issued an Interim Account, requiring the defendant to pay approx. £11.5m, £8m of which was money previously paid to the Defendant in exchange for planning works.

A dispute arose about the validity of termination and the basis of the interim account. The Claimant referred the dispute to the same adjudicator, who ordered the defendant to pay approx. £9.8m. The Claimant brought proceedings in the TCC to enforce the decision.

The Defendant’s main argument was that s.105(2) the 1996 Act excluded from its ambit the ‘assembly, installation or demolition of plant or machinery (…) on a site where the primary activity is (…) power generation’, and the payments made under the contract involved payments for excluded activities. The Claimant argued that no payments had been made for excluded activities, as the site had not even been excavated.

Mr Justice Coulson noted that the Defendant was concentrating on the overall contract, not the dispute which had actually been referred to adjudication (para 28). This, according to Coulson J, is a misreading of the 1996 Act. What matters is whether any part of the dispute, not the whole Project, had to do with excluded operations. If not, there would be no issue of jurisdiction.

The preparatory works, such as the preparations of a business plan, are not excluded operations. Such preparations are often undertaken in major construction projects, and therefore fell under s.105(1)(e) of the 1996 Act. As no plant was ever brought to the site, the disputes did not concern excluded activities. No issue of jurisdiction therefore arose.

A secondary argument by the Defendant was that the Defendant had made a general reservation of jurisdiction, but Coulson J swiftly concluded that the only relevant communication by the Defendant had been made in conjunction with the first adjudication, whereby the Defendant had expressed concerns of the timescale of the adjudication in light of some new evidence. The relevant letter was therefore only a reservation relating to the Defendant’s concerns about ‘ambush’ (para 47). By the time of the first adjudication decision, the issue had fallen away. There was therefore no defence to the claim to enforce the adjudicator’s decisions.

As a fall back argument, the Defendant claimed for a stay of execution. In essence, the argument was that because the Claimant is a Special Purpose Vehicle, there is a risk that the interim account will include an overpayment that will never be repayed when the SPV is wound up. In light of inadequate financial information provided by the Claimant (paras 66 and 67) and the fact that the Defendant would be stuck with the interim account until a final accounting process (which could take months or years) is concluded (para 72), a stay was necessary (para 77). It was not appropriate for the Claimant to ‘stonewall [the Defendant’s request for financial information] until the last minute and beyond’ in answer to ‘legitimate concerns’ (para 78).

Coulson J therefore held that only £4.5m had to be paid to the Claimant, and a further £1m to court.

The case provides guidance on various issues. The idea that the broad purpose of the contract is ignored in determining whether aspects of the specific dispute concern excluded activities is supported by former authorities such as Cleveland Bridge (UK) Limited v Whessoe-Volker Stevin Joint Venture [2010] EWHC 1076 (TCC) where Ramsay J held that fabrication drawings, off-site fabrication or delivery to site were not excluded activities within the wording of s.105(2)(c), that case relied on the rather more specific wording of that section that the ‘erection or demolition of steelwork for the purposes of supporting or providing access to plant or machinery’ is an excluded activity. Erection of steelwork is clearly a very specific exclusion in the statute, and naturally any planning works would be excluded from it.

Coulson J nonetheless held the same principle to apply to the rather more general ‘assembly, installation or demolition of plant or machinery’ to exclude prior planning works. The excluded activities are therefore to be taken literally as ‘installation or demolition (…) on a site.’

It is also clear that a reservation of jurisdiction points should be made early, explicitly and unequivocally if the Defendant is to rely on them later. A general grievance about timescale is not enough.

The use of SPVs in construction projects has also been clarified in the case. It is far more likely that a claim won my an SPV claimant is subject to at least a partial stay of execution if the project that formed its purpose has come to an end. This is because there is every incentive for the SPV to be dissolved the minute it pays its debts to the parent company (para 71), and leave the Defendant of an interim account without due repayments.