Adjudication Matters – August 2020

10th August 2020

The waste land? TCC considers statutory exclusions to adjudication regime in recent case…

In Engie Fabricom (UK) Limited –v- MW High Tech Projects UK Limited the TCC determined that the parties to a sub-contract did not have the statutory right to adjudicate, having regard to exclusions set out within the Construction Act.

In this recent case, the Technology and Construction division of the Business and Property Courts (the TCC) was asked to determine whether the primary activity at an ‘energy from waste’ plant was power generation, or waste treatment. Under the Construction Act, the parties would only have the statutory right to adjudicate if the plant’s primary activity was waste treatment. Upon considering expert evidence, the TCC found that the primary purpose of the plant was power generation, and so declined to enforce two adjudication decisions in the Claimant’s favour on the grounds that the Construction Act granted neither party a statutory right to refer disputes arising under the contract to adjudication. The adjudicator had therefore lacked jurisdiction to determine the parties’ dispute, and the Claimant’s enforcement application was dismissed.

Background

Engie Fabricom (UK) Limited (the Claimant) sought to enforce two adjudication decisions against MW High Tech Projects UK Limited (the Defendant) with a combined value of £367,723.85 plus VAT.

The parties had entered into an amended ICE sub-contract (the Sub-Contract) in connection with a fluidised bed gasification plant in Kingston upon Hull. Under the main EPC contract (the EPC Contract), the Defendant was appointed as the main contractor to carry out the design and manufacture of the plant. The Claimant was the Defendant’s sub-contractor, and was engaged to carry out the installation of the plant under the Sub-Contract.

The plant operation consisted in converting refuse derived fuel (RDF) into steam by a combination of gasification and incineration processes. The steam generated then propelled turbines which in turn produced electricity which was sold to the National Grid. Under the EPC Contract the performance of the plant was linked to targets concerning heat and energy production. The EPC Contract did not set targets or other expectations regarding the volume of waste to be processed.

The plant operator received income from three major sources, including (i) gate fees paid by suppliers of the RDF, (ii) payments from the National Grid, and (iii) grants and subsidies, including a grant paid by the European Regional Development Fund in connection with the plant’s production of renewable energy. Taken as a whole, 74% of the plant’s income derived from activities relating to the production of energy. Gate fees paid by RDF suppliers accounted for 26% of the plant’s income by comparison.

The Dispute

The parties fell into dispute regarding payments due under the Sub-Contract. The Claimant referred the disputes to adjudication, and was successful in achieving awards in its favour in two subsequent adjudication decisions. However, as the Defendant failed to comply with the adjudication decisions, the Claimant initiated enforcement proceedings seeking payment of the sums awarded.

Exclusions under the Construction Act

A party’s statutory right to refer construction disputes to adjudication is subject to exclusions, including those set out at s.105(2)(c) of the Construction Act 1996 (the Act). Section 105(2)(c) of the Act confirms that the statutory right to adjudicate does not apply where the primary activity of a plant is power generation.. The Defendant argued that s.105(2)(c) of the Act applied, and therefore neither party had ever held the right to refer disputes under the Sub-Contract to adjudication. Accordingly, it was argued that the Claimant’s enforcement action should fail, as the adjudicator had lacked jurisdiction to determine the Sub-Contract disputes.

The Claimant argued that the primary activity of the plant was waste treatment. The Claimant acknowledged that the plant did in fact generate electrical power from waste, but claimed that the primary purpose of the plant was to avoid waste going to landfill, and that power generation was a secondary, merely subsidiary activity of the plant. The Act does not exclude the right to adjudicate where the primary activity of a plant is waste treatment, and so the Claimant contended that the adjudicator had full jurisdiction to determine the Sub-Contract disputes. On this basis, the Claimant argued that the Court should now enforce the two adjudication decisions in its favour.

The principal questions before the Court therefore concerned the meaning of s.105(2)(c) of the Act, and the approach to be adopted  to determine the primary activity of the plant.

The Court’s Decision

The Court found that the primary activity of the plant was power production. The overriding purpose of the EPC Contract was to procure a profitable power generation plant in which waste disposal operations were subsidiary to the plant’s primary activity of power generation. In reaching this conclusion, the court gave weight to the fact that the main source of income to the plant was directly connected to its production of electrical power. Taking the plant’s funding model in conjunction with the EPC Contract, the Court determined that the plant’s primary activity was to produce and export electrical power, and to thereby generate profit.

Consequently, the Claimant’s enforcement application was dismissed on the grounds that s.105(2)(c) of the Act excluded the parties’ right to adjudicate, having regard to the primary activity of the plant. The adjudication decisions in the Claimant’s favour were unenforceable as the adjudicator had lacked jurisdiction to determine the disputes arising under the Sub-Contract.

Practical Consequences

This decision emphasises the need for parties to carefully consider whether adjudication is a viable dispute resolution procedure before commencing proceedings. Where a dispute concerns works which fall within any of the exclusions set out at s.105(2) of the Act, the parties should consider alternatives to adjudication. Determining whether relevant works are subject to the s.105(2) exception may, as shown in this case, require consideration of how a plant’s primary activity is likely to appear to a court. Evidently this can be a complex question involving vast quantities of factual information which will necessarily be case-specific.

Where parties (such as the Claimant in this case) mistakenly believe they have a right to adjudicate, they run the risk of wasting large quantities of time and money pursuing adjudications which ultimately cannot be enforced. Equally, where a party is on the receiving end of an adverse adjudication decision, it should consider whether a jurisdictional challenge is available before complying with the decision. In this case, the Defendant’s refusal to comply with the adjudication decisions was ultimately affirmed by the TCC, who agreed that the adjudicator lacked jurisdiction to determine the Sub-Contract disputes.

Parties remain free to agree an express contractual right to refer disputes to adjudication at drafting stage even where the statutory right to adjudicate is excluded by the Act. It is therefore in any party’s interests to take specialist legal advice regarding its adjudication rights not only when faced with potential disputes, but also during the earlier stages of drafting and negotiating contracts for construction projects. Ensuring that a party clearly understands its dispute resolution options from the project outset will guard against uncertainty and the risk of wasting time and costs in the event of a dispute materialising.