A waste of energy?

Energy from waste sites: can you adjudicate?

Power generation sites have long created an issue for adjudications. Section 105(2)(c) of the Housing Grants Construction and Regeneration Act 1996 (the ‘Construction Act’) provides a partial exclusion from its terms, including the right to adjudicate, where a site’s primary activity is power generation. Many sites, however, do more than just generate power. How do you work out a site’s primary activity?

The provisions of the Construction Act apply to all contracts for construction operations. Section 105(2)(c), however, provides that:

“(2) The following operations are not construction operations within the meaning of this Part:

…

(c) 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—

(i) nuclear processing, power generation, or water or effluent treatment, or

(ii) the production, transmission, processing or bulk storage (other than warehousing) of chemicals, pharmaceuticals, oil, gas, steel or food and drink…”

As such, if the primary function of a waste from energy site is considered to be waste disposal then adjudication is a mandatory dispute resolution process under the Construction Act for all elements of the works. If the primary purpose is, however, considered to be power generation then the assembly, installation and demolition of plant or machinery and its associated steelwork would be outside of the Construction Act. This, in turn, would mean that adjudication would only be available if contractually provided for. This point was put to the test recently in Engie Fabricom (UK) Limited v MW High Tech Projects UK Limited [2020] EWHC 1626 (TCC).

MW were the main contractor for the construction of a new energy from waste plant at the Energy Works Hull facility. Engie Fabricom UK Limited (EFL) was its sub-contractor, tasked with the installation of the gasification plant. The sub-contract was an amended IChemE Yellow Book 4th Edition. Under clause 47 of the sub-contract, adjudication was only available where the Construction Act applied.

Two disputes arose between the parties, both settled by adjudication. EFL was successful in both and sought to enforce the decisions through the courts. In its defence, MW argued that the exclusion in section 105(2)(c) applied, so the adjudicator had lacked jurisdiction.

It fell to the court to determine whether the primary activity of an energy from waste plant was in fact power generation. In considering this point the court set out the two key legal principles guiding it:

(iii) The works will not fall within the exception if power generation is merely a secondary or ancillary activity (ABB Zantingh Limited v Zedal Building Services Limited [2001] BLR 66 (TCC));

(iv) Identifying the primary activity is a question of fact (Laker Vent Engineering Ltd v Jacobs E&C Ltd [2014] EWHC 1058 (TCC)).

In considering the factual aspects, the court noted that it was convenient to consider the in respect of a number of material factors:

(vi) The regulatory framework and policy background;

(vii) The planning approval for the plant. This showed an equal weighting between waste disposal and energy generation so was of no assistance;

(viii) The Environment Agency’s grant of permit for the facility. While this was for the thermal treatment of waste, the permit allowed for a change of status to energy recovery, and qualification for this change of status was a contractual obligation within the main contract;

(ix) Operations on the site, having regard to the requirements of both the main contract and sub-contract. In this case, the overriding requirements of the contracts showed that the plant could be rejected if the energy generation aspects were not efficient enough; and

(x) The financial model for the plant, which showed that the plants main source of income would be electricity exports to the National Grid and subsidies/grants.

Given the factual background, the court determined that the primary activity at the site was power generation. EFL’s works, therefore, fell into the exception at section 105(2)(c) of the Construction Act. Its adjudications were unenforceable.

Conclusions

In any contract where the works could fall within one of the section 105 exceptions it is important to know the primary activity of the site. The Engie Fabricom case shows that there are a number of factors which may be considered as part of the factual background used to determine the primary activity. Parties who are considering adjudicating a dispute should, therefore, review all elements of the factual background to ensure that any decision will be enforceable.

Further, parties entering into a contract related to a power generation site should consider whether the want to remove the uncertainty of section 105(2)(c) entirely by providing for contractual adjudication. The difficulties surrounding “hybrid” contracts are well known and have been considered by the courts on several occasions (see for example C Spencer Limited v M W High Tech Projects UK Limited [2020] EWCA Civ 331). These could be avoided if parties agreed to adjudication up front in their contract.