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Thu October 28 2021

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Welcome clarity for hybrid contracts

4 Nov 19 Judgment avoids complicating payment notices under hybrid contracts. Natalie Cane, a solicitor at Irwin Mitchell, reports.

When the Construction Act was drafted, decisions were taken to exclude from its ambit certain types of activities and project types that might, in ordinary parlance, be considered construction works.  The exclusions were always likely to lead to dispute and so it has proved.  One particular area of difficulty is so-called hybrid contracts, which include both operations that are covered by the Act and operations that are not.

The courts had to grapple with such issues again in October, in C Spencer Limited v MW High Tech Projects UK Limited.  MW was engaged as the main contractor to design and construct a power plant that was to be capable of processing fuel from waste.  Spencer was, in turn, engaged by MW under a subcontract to design and construct the civil, structural and architectural works for completion of the plant.

The subcontract contained both construction and non-construction operations. The non-construction elements included assembly of plant and erection of steelworks to provide support and access to the plant and machinery.

The subcontract allowed for interim payments and did not make any reference to dividing up sums due in relation to the two types of operations. The parties followed the payment provisions and for the first 30 interim payments did not concern themselves with distinguishing between the construction and non-construction elements.

Spencer’s application number 32 included a covering letter detailing the division of works between the two operations. In response, MW submitted a payment notice which did not make reference to the two types of operations. Spencer alleged that it did not constitute a valid payment notice or pay less notice and therefore the sum applied for was due.

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MW disagreed, so Spencer began Part 8 proceedings claiming that a payment notice had to identify which works were construction operations and which were not.  Failing that, they said, it was not a valid notice of payment.

The Court considered that the core purpose of the statutory payment scheme under the Act is to protect the cash-flow position of smaller contractors and subcontractors during a project. They then considered the effect of the Act on a hybrid contract.  Although the Act does limit the statutory payment requirements to construction operations as defined in the legislation, the parties are at liberty to agree that the non-construction obligations are subject to the same mechanism.  What matters is that, for the activities to which the Act applies, the agreed terms comply with the statutory provisions.  There is nothing to stop the parties applying the same terms to activities to which the Act does not apply.  The relevant sections of the Act do not require sums associated with construction obligations to be separately identified.

It followed from this that MW’s payment notice was valid and Spencer’s claim was dismissed.

This is one of the more straightforward decisions on hybrid contracts.  It is a welcome clarification, avoiding unnecessary complication in an area that is confusing and convoluted enough.

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