What is a Construction Contract?
Under section 104 of the Construction Act 1996 (“The Construction Act”) a construction contract is an agreement with a person for:
- The carrying out of construction operations (either by one of the parties or a subcontractor)
- Providing labour (either a party’s own labour or that of another party) for the carrying out of construction operations.
A construction contract can include contracts with construction professionals and can include agreements in relation to construction operations such as agreements to carry out architectural, design or surveying work; to provide advice on building, engineering, interior or exterior decoration; or for the laying out of a landscape.
What are construction operations?
Under Section 105(1) of the Construction Act, construction operations include:
- The construction, alteration, repair, maintenance, extension, demolition or dismantling of:
- Buildings or structures forming or to form part of the land whether permanent or not and;
- Any works forming or to form part of the land including walls, roadworks, power-lines, telecommunication apparatus, aircraft runways, docks and harbours, railways, inland waterways, pipe-lines, reservoirs, water-mains, wells, sewers, industrial plant and installations for purposes of land drainage, coast protection or defence.
- Installation in any building or structure of fittings forming or to form part of the land including systems of heating, lighting, air-conditioning, ventilation, power-supply, drainage, sanitation, water supply or fire protection, or security or communications systems.
- External or internal cleaning of buildings and structures so far as carried out in the course of their construction, alteration, repair, extension or restoration.
- Operations which form an integral part of, or are preparatory to, or are for rendering complete the operations above, including site clearance, earth moving, excavation, tunnelling and boring, laying of foundations, erection, maintenance or dismantling of scaffolding, site restoration, landscaping and the provision of roadways and other access works.
- Painting or decorating the internal or external surfaces of any building or structure.
The types of works which do not fall under the definition of construction operations include:
- Drilling for or excavation of, oil or natural gas.
- Extraction of minerals, tunnelling or boring, or construction of underground works for this purpose.
- Assembly, installation or demolition of plant or machinery, or erection or demolition of steelwork for the purposes of supporting or providing access to plant or machinery on a site where the primary activity is: nuclear processing, power generation, or water or effluent treatment, the production, transmission, processing or bulk storage (other than warehousing) of chemicals, pharmaceuticals, oil, gas, steel or food and drink.
- Manufacture or delivery to site of building or engineering components or equipment, materials, plant or machinery or components for systems of heating, lighting, air conditioning, ventilation, power supply, drainage, sanitation, water supply or fire protection, or for security or communications systems, except under a contract that also provides for their installation.
- The making, installation and repair of artistic works, being sculptures, murals and other works that are wholly artistic in nature.
- Certain agreements falling under the Highways Act 1980.
- Certain agreements falling under the Town and Country Planning Act 1990.
- Certain externally financed development agreements under the National Health Service (Private Finance) Act 1997.
- Certain finance agreements.
- Certain development agreements.
- Contracts with residential occupiers.
The above is a summary only of the legislation which applies to construction contracts and the interpretation of that legislation will depend on the facts and circumstances of each particular case. If you are unsure whether the Construction Act applies to your contract, you should always seek legal advice.
Settlement and Alternative Dispute Resolution (“ADR”)
Whilst settlement and ADR are encouraged in all types of dispute, there is a specific requirement within the Pre Action Protocol on Construction and Engineering disputes for parties to meet for a without prejudice meeting before litigation is commenced.
It may be the case that ADR is not cost effective or appropriate in a particular set of circumstances, but parties should be aware of the risk of a failure to try to resolve matters in this way, including the court interpreting a refusal to participate in ADR as unreasonable behaviour and imposing costs sanctions.
It is also important to check the terms of your contract, including any standard form contracts, to see whether a mediation, arbitration or adjudication clause applies and to ensure compliance with that together with any pre-action requirements within the contract.
If the contract falls within the definition of construction contracts, under the Construction Act, then there is likely to be a statutory obligation on the parties to adjudicate in any event.
Mediation
Mediation is a without prejudice, confidential process which provides the parties with an opportunity to meet and discuss the issues in dispute and to explore settlement, with the assistance of an impartial, jointly appointed mediator. A mediator is not a judge and will not make a decision or advise the parties but will try to encourage the parties to settle their dispute.
The parties can mediate at any stage in the proceedings, but as set out further below, in Construction and Engineering Disputes, the parties are encouraged to do so prior to issuing legal proceedings and in fact, it is often less costly the sooner it is done.
Mediation is a without prejudice and confidential process so the parties cannot rely on anything said at the mediation in a subsequent litigation. As many construction disputes include complex issues, numerous parties and several different but linked claims, mediation is often used in these kinds of disputes.
Arbitration
Arbitration is a less formal alternative to litigation and is based on all parties’ agreement to arbitrate. It can often be useful in international disputes. An arbitration clause will usually be agreed at the time the parties enter into a contract. Some standard form contracts, such as JCT contracts including mandatory arbitration clauses. The arbitration procedure and the jurisdiction of the arbitrator will be governed by the arbitration clause.
The arbitrator will usually be a specialist in the matters subject to the dispute and his or her decision will be binding.
Adjudication
Adjudication is a procedure used in construction contracts to resolve disputes which is generally much quicker and less costly than litigation. The procedure will usually take around 28 days, though an extension may be agreed between the parties and it is, therefore, a useful way of protecting cash flow during an ongoing construction project.
It is appropriate for disputes relating to interim payments, delay and disruption of works, extensions for time for completion of the works and the final account. It is not generally meant for complex claims but can also be used in relation to a breach of contract, the termination of a contract and professional negligence. An adjudicator’s decision is binding and can be enforced in the Technology and Construction Court.
A construction contract must contain an adjudication procedure which complies with the requirements of section 108 of the Construction Act 1996. If it does not comply, then the all of the adjudication provisions of Part 1 of the Scheme for Construction Contracts (England & Wales) Regulations 1998 will apply. In other words, there is a statutory obligation on parties to a construction contract to adjudicate and this is not something that can be contracted out of.
Pre Action Protocol on Construction & Engineering Disputes
The Pre Action Protocol on Construction and Engineering Disputes governs the parties conduct before legal proceedings are issued and is designed to promote settlement and reduce court time and costs.
The spirit of the protocol should, apart from in certain excluded circumstances, be complied with and a failure to do so could result in an adverse order being made against the party which has breached it. If there has been a flagrant or very significant disregard for the terms of the protocol then costs penalties may be imposed against the breaching party. Alternatively, the court might order a stay of proceedings until steps in the protocol have been taken.
Broadly, the current protocol is as follows:
- Claimant must serve a letter of claim
- Within 14 days of service of the Claimant’s letter of claim, the Defendant must acknowledge receipt
- Within 28 days of service of the Claimant’s letter of claim, the Defendant must serve a letter of response and, if applicable details of any counterclaim.
- If no acknowledgement or response is received then the Claimant may issue proceedings, either after the 14 days in the absence of an acknowledgment, or after 28 days in the absence of a response and counterclaim.
- If a counterclaim is served then the Claimant has 21 days to serve its reply to the counterclaim
- 21 days after the Claimant’s reply to counterclaim the parties must meet for a without prejudice meeting or must participate in some other Alternative Dispute Resolution (ADR) process, such as mediation or arbitration.
- If no counterclaim is served by the Defendant, then the above without prejudice meeting or ADR process must take place within 21 days after service of its response.
- Hopefully, after ADR, the parties will be able to reach a settlement which ends the dispute.
- However, if ADR is not successful then the Claimant is free to issue legal proceedings.
The Technical and Construction Court (TCC)
If ADR is unsuccessful and/ or the pre-action protocol has not resulted in settlement, then the next step is to consider litigation. As in all cases, litigation should always be considered as a last resort.
In relation to Building and Construction Disputes, depending on the value and the complexity of the issues, such claims may need to be dealt with in the Technology and Construction Court (TCC).
The TCC is a specialist court with specialist Judges who are adept at dealing with technically complex issues or questions.
The sorts of construction claims likely to be suitable for the TCC include:
- Claims arising out of a building contract.
- Claims arising of the appointment of a professional for example, claims for professional negligence by or against engineers, architects, surveyors, accountants and other specialist advisors.
- Claims by or against local authorities relating to their statutory duties concerning the development of land and construction buildings.
- Claims relating to design, supply and installation of computers, software and network systems.
- Claims relating to the quality of goods sold or hired.
- Claims relating to the quality of work done, materials supplied or services provided
- Claims arising out of fires.
- Challenges to an arbitrator’s decision in a construction or engineering dispute, including applications for permission to appeal.
Should you have any concerns regarding a construction contract you have entered into, or are considering entering into then do not hesitate to contact us and our team of specialist lawyers will be happy to help.