When is a contract a construction contract?
Registered Providers of social housing (RPs) are often at the forefront of meeting the UK government’s housing targets. With that comes the need to purchase land and procure development of new homes. In addition, RPs must maintain large amounts of existing stock and, as a result, procure contracts for works such as refurbishments, re-fits, repairs, maintenance and the installation of new technologies etc. Such contracts, by definition, involve “works” and are likely to engage the application of the Housing Grants Construction and Regeneration Act 1998 (the “Construction Act”).
Why is the Construction Act (the “Act”) important?
The Act was introduced to address unfair payment practices, whereby money was staying with employing entities for too long, which had contributed towards high levels of insolvencies within the construction sector.
The Act requires that certain provisions, such as payment terms, a right of suspension, and a right to adjudicate, are included within all construction contracts to which the Act applies. The Act contains implied terms which the parties may innocently breach if these are not expressed in the drafting of the relevant contract. This can be particularly important in the world of “smash and grab” adjudications (where the payee is owed the sum it claims on technical grounds of non-compliance with the Act, as opposed to be truly entitled to the sums claimed based on valuations of the works).
Definition of a “Construction Contract” under the Act
Section 104 of the Act defines a construction contract as an agreement with a person for any of the following:
- The carrying out of construction operations
- Arranging for the carrying out of construction operations by others, and
- Providing labour, or the labour of others, to carry out construction operations.
It specifically includes agreements relating to architectural, design or surveying work. Additionally, it provides advice on building, engineering, interior or exterior decoration and on the laying out of landscapes in relation to construction operations.
Section 105 goes on to define construction operations as:
- Including operations, you would anticipate with the construction, repair, maintenance or demolition of buildings and structures. It doesn’t just cover buildings, but also works forming part of the land, including walls, roads, power lines, phone masts, runways, docks, harbours, industrial plants, land drainage and coastal protection.
- Internal works are also included, for example, the fit out, heating, mechanical and electrical systems, fire protection, security, and communications systems.
The definition of construction operations is therefore very broad and can include tasks such as cleaning (if in the context of construction), repair, extension or restoration. Site clearance and excavation works are also included, as are painting and decorating.
However, it is important to note that the Act excludes certain contracts from the above definition including:
- Contracts for residential occupiers, e.g., a house extension
- Contracts lasting less than 45 days, and
- Drilling for gas, extraction of minerals, nuclear processing, power generation, water effluent, production/processing or storage of chemicals, oil, gas, steel or food and drink, manufacture or building components.
Therefore, a pure supply contract, purchase contract, or funding contract would not fall within the Act. However, in (UK) Limited (Contractor) v Duro Felguera UK Limited (Employer) it was held that “hybrid contracts” (where the matter includes both construction and non-construction elements) can fall within the Act.
This means that RPs need to consider whether the Act applies to commonly used contracts such as:
- Works agreements
- Building contracts
- Works obligations within development agreements/sale or purchase/funding contracts
- Infrastructure works including roads, car parks etc.
- Modular contracts
- Consequences of non-compliance
A detailed analysis of the consequence of non-compliance with the Act is beyond the scope of this article. The important take-away here is to note that should the required provisions as set out in the Act not be included in the relevant contract (for example a Due Date, Final Date for Payment, mechanism for a Payment and Pay Less Notice), then they will be implied into the contract. This means that parties can easily fall foul of the Act simply by being unaware that the terms in the written contract they are reading are overridden by implied terms found in the Act.
Before drafting and finalising any contracts which may trigger the Act’s application, RPs should consider if the Construction Act applies to all or part of works from the outset. A detailed analysis will be required, as there can be expensive consequences if things go wrong. We recommend therefore that RPs always seek independent legal advice from a construction lawyer whenever there is any suspicion the Act may apply.