Sir Robert Akenhead, with assistance from David Johnson, considers the question: when are construction operations not ‘construction operations’ with modular building methods? In their article “The offsite trap: modular methods and contract law” for Building Magazine.
Originally published in Building Magazine on 2 June 2020
The debate on offsite construction (including the recent government consultation and select committee report) has mainly focused on perceived improvements in efficiency and safety, but there is another aspect to consider: to what extent do these methods sit uneasily with the traditional legal mechanisms by which construction contracts are regulated?
The starting point might be: does the Construction Act apply, and to what extent? By section 104(1), the act applies to “construction operations” carried out in England, Wales or Scotland; section 105 sets out an extensive list of matters included in and excluded from that definition. Important consequences follow: a contract falling outside the act will not be subject to the adjudication mechanism provided for by the Scheme for Construction Contracts, nor will the act operate to introduce mandatory minimum payment provisions where the contract fails to provide an “adequate mechanism”.
Extensive case law has addressed what is and is not covered by “construction operations”, although the exclusions from the list have caused the most difficulty. The issue has been given new life with the increase in offsite construction: units or elements of a building are fabricated elsewhere, and the on-site works can comprise little more than putting the constituent parts together. The “territoriality” of the Construction Act is relevant here: if the fabrication work takes place within the jurisdiction and is shipped for installation in an overseas project (outside of England, Scotland and Wales), this will not, as was made clear in Palmers Ltd vs ABB Power Construction Ltd  BL 426 (TCC), comprise “construction operations” and the act will not apply.
But what about when fabrication takes place elsewhere, and the modules are shipped for installation within the jurisdiction? Ostensibly, if the relevant contract provides for delivery to and subsequent installation on site, the Construction Act will apply (section 105(2)(d)). However, the scope of application is somewhat unclear: in Palmers, the court, looking at section 104(5), treated the “construction operations” part of the contract as severable from the rest, with the Construction Act applying only to the former. This approach has been followed subsequently.
Our orthodox understanding of an ‘adequate payment mechanism’ risks being disrupted by the new range of construction techniques
In practice, however, that is not always a recipe for clarity. An adjudicator may have jurisdiction in respect of the on-site element but not the fabrication work: can he or she decide a dispute in respect of the final account? Or do the parties risk going through an expensive adjudication only to be left with an unenforceable decision? The issue will become more complex with new offsite construction methodologies emerging.
The position regarding payment provisions is equally difficult. The Scheme for Construction Contracts and the requirement that the contract provide an “adequate payment mechanism” will apply in respect of construction operations, but most contract mechanisms are unlikely to be easily “severable”. In Severfield (UK) Ltd vs Duro Felguera UK Ltd  EWHC 3352 (TCC), Mr Justice Coulson noted the possibility of a hybrid payment regime that covered the construction operations and non-construction operations aspects, and while “uncommercial, unsatisfactory and a recipe for confusion it [was] the inevitable result of parliament’s desire to exclude what would otherwise have been obvious construction operations from the ambit of the 1996 act”.
At the same time, the valuation of progress payments (or ascertaining whether stage payments have been earned) is likely to be more challenging where the fabrication work takes place away from the purview of the contract administrator. In CIMC Ltd (formerly Verbus Systems Ltd) vs Bennett (Construction) Ltd, the judge at first instance found that the act and the scheme applied to the whole contract, despite fabrication of modular hotel units taking place in China before their inspection, shipment and, ultimately, installation at a site in Woolwich. Although the appeal focused on whether the milestone payment provisions in the parties’ subcontract comprised an adequate mechanism (and did not challenge the underlying application of the act), there was a tacit recognition that imposing regular progress payments under the scheme sat uncomfortably with a situation where most of the construction work was completed before the units left the workshop in China. The Court of Appeal instead upheld the contractual milestone provisions, but the case exemplifies how our orthodox understanding of an “adequate payment mechanism” risks being disrupted by the new range of construction techniques.
That evolution means that a one-size-fits-all solution is unlikely, especially when existing case law on what comprises “construction operations” has been consistently inconsistent: the courts have repeatedly made clear the fact-sensitive nature of the enquiry. It may therefore be difficult for parties to work out whether some, all or none of their contract is subject to the payment and adjudication provisions of the Construction Act. Expensive satellite litigation to resolve such questions is unlikely to be in anyone’s interests.
Therefore, if it is in any way questionable as to whether the contract relates to “construction operations”, make sure you pay close attention to your payment provisions, and ensure that adjudication is included as a contractual right if it is a dispute mechanism you envisage using in order to avoid being caught out.