Cover Feature | Construction Do you have a “construction contract” and why do you need to know?

By Caroline Watkins, Partner and Olivia Nichol, Paralegal in the Construction team at Thomson Snell & Passmore

In the construction industry it is important to identify whether you are entering into a “construction contract” under the meaning in the Housing Grants, Construction, and Regeneration Act 1996 (the “Construction Act”).

Why does this matter?

Determining whether you have a construction contract or not is important because it affects your rights of payment and your options if a dispute arises.

If you have a construction contract you may rely upon the payment provisions in the scheme for construction contracts which applies under the Construction Act. The scheme imposes construction friendly e ible payment provisions which will trump any existing payment provisions which do not comply with the scheme. If you are unaware that your contract constitutes a construction contract, you may end up owing or forfeiting interest as a result of following the non-compliant contractual provisions.

You can also use adjudication to resolve disputes if your contract qualifies as a construction contract. This means that even if you did not include an express provision to adjudicate, you will have the right to settle a dispute by way of ad udication nonetheless. he benefits to adjudication include cost (it is much cheaper than issuing proceedings), speed (matters can be resolved within 28 days) and an adjudicator’s decision is enforceable, unlike a mediator.

Do I have a construction contract?

A “construction contract” means (broadly) an agreement with a person for the carrying out of construction operations, arranging for the carrying out of construction operations or providing labour for construction operations, according to s104(1) of the Construction Act. “Construction operations” are subject to a wide interpretation.

The recent case of Abbey Healthcare (Mill Hill) Ltd v Augusta 2008 LLP (formerly Simply Construct) involved consideration of whether a third party agreement (in this case a collateral warranty) could be a construction contract.

The UK Supreme Court held that it will only be a construction contract if the contractor undertakes a contractual obligation to the third party with the object or purpose of carrying out construction operations. The obligation must be separate and distinct from the contractor’s obligation to carry out construction operations under the original contract. Where the contractor is not carrying out works directly for the third party, it will not be an agreement “for” the carrying out of construction operations.

According to this judgment, any contract which does not involve direct instruction or payment for the carrying out of construction operations is not deemed a construction contract and will not benefit from the scheme for payment or the adjudication regime. This may affect how collateral warranties in particular are valued in the market generally - we may see other forms of security becoming more popular for interested third parties as a result.

If you have any questions about construction contracts, please get in touch info@ts-p.co.uk