A ruling from the Court of Appeal today added clarity to an issue that has been causing construction disputes for the past two decades: hybrid contracts.
The case, C Spencer Ltd v MW High Tech Projects UK Ltd, centres on deficiencies in the Housing Grants, Construction and Regeneration Act 1996 and the Local Democracy, Economic Development and Construction Act 2009 – collectively referred to as the Construction Act.
The Act was designed to improve cashflow in the construction industry and streamline its dispute resolution process. It has been a great success, according to Lord Justice Coulson, who wrote today’s judgment.
“Unfortunately, the Act is not as comprehensive as it might have been,” he said in the ruling. “Many contracts for works which, on any sensible definition, are construction operations were excluded from the ambit of the Act.”
This means that when disputes occur, issues that are covered by the Act can go to specialist adjudication, but the adjudicator cannot consider construction issues that are outside the ambit of the Act.
This has led to the construction industry developing “hybrid contracts” which separately cover issues within the Act and outside it.
“In the last 20 years, much too much time and judicial resource has been spent grappling with the problems created by such hybrid contracts, of which this appeal is but one example,” Coulson LJ said.
“But until the Act is amended to do away with these unnecessary distinctions, the courts have to do their best to resolve the resulting, self-inflicted problems.”
However, this case, he said, raises a point that the courts have not previously considered.
This issue is: when a hybrid contract is in operation, is the payment notice required to separately identify the sum due for construction under the Act, along with the basis for calculation?
Although, according to the judge, “the issue might appear somewhat dry”, it is very important because, if the parties fall out over the size and make-up of the bill, this affects how they will resolve the issue.
And in this case, the disputed bill is for more than £6m.
The case centres on the construction of a power plant. In 2015, MW High Tech Projects (MW) subcontracted to C Spencer Ltd (CSL) to design and construct the civil, structural and architectural works on the facility. The subcontract price was £35,650,398.
The subcontract divided the project into stages and staged payments. The payment notices did not break out construction work under the Act and construction work not under the Act.
This caused no problems until, in 2018, the parties fell out over the 31st payment.
When the parties disagreed about the amount, CSL gave notice to MW that it intended to take the matter to adjudication. MW stated that the adjudicator could only hear issues relating to the Act, and as the bill contained payment for work not covered by the Act, it couldn’t go to adjudication.
By the time of the 32nd payment, in February 2019, CSL was breaking down the bill into construction and non-construction items. It was asking for more than £3m.
MW made its own calculations, and countered that CSL owed MW almost £7m.
This ended up in the Technology and Construction Court, and subsequently the Court of Appeal.
At the hearing, which took place at the end of January, lawyers for CSL argued that in a hybrid contract a payment notice that doesn’t specify the amount relating to construction operations doesn’t comply with the Act.
Lawyers for MW, however, argued that this was an over-interpretation of the Act. Construction and non-construction work was specified in the subcontract, so accounting for them differently was unnecessary, and would lead to “confusion, complexity and additional costs”.
In the High Court CSL lost, with the judge ruling that the payment notice does not necessarily have to break out construction and non-construction work.
In his ruling, Coulson LJ said the issue was a difficult one, but he agreed with the High Court ruling.
“I have not found this issue entirely straightforward; like most debates arising out of hybrid contracts, because of the artificial circumstances created by the Act, it is not hard to see the merits of both sides’ submissions,” he said.
“However, I have reached the firm conclusion that the judge was right to reject CSL’s interpretation.”
His reasons were specific to the contract, but also based on practicality.
“The importance of the difference between construction and non-construction operations under a hybrid contract only arises if there is a dispute as to the sum due,” he said.
This can be dealt with in the wording of the subcontract, and in this case both parties had initially agreed to the payment arrangements.
“It would be absurd if two separate payment regimes had to be created here,” the judge said.
And in addition, the Construction Act was intended to create certainty and transparency, not increase complexity.
“Finally, I am in no doubt that requiring parties to a hybrid contract to deal separately with construction and non-construction operations for every interim payment application, in circumstances where they have agreed one set of payment terms for both types of operation which comply with the Act, would create additional layers of complexity and cost,” he said.
“For all those reasons, therefore, attractively though the points were argued, I reject CSL’s submissions. In my view, the [lower court] judge reached the right answer. Moreover, her approach has the additional advantage (not to be overlooked in these adjudication cases) of being a sensible and pragmatic resolution of the issue,” he ruled.
C Spencer Ltd v MW High Tech Projects UK Ltd
Court of Appeal (Senior President of Tribunals, Lord Justice Coulson, Lord Justice Baker) 6 March 2020
Alexander Nissen QC and Matthew Finn (instructed by Gosschalks Solicitors) acted for the appellant.
Simon Hargreaves QC and Tom Owen (instructed by Clyde & Co LLP) acted for the respondent.
