In the last of our series on adjudication, we will look at when the right to adjudication arises.
When does the right to adjudication apply?
Whether adjudication is mentioned in the contract or not, the Housing Grants, Construction and Regeneration Act 1996 (the "Act") applies where there is a "construction contract" which under Section 104 of the Act means a contract for:
- the carrying out of construction operations;
- arranging for the carrying out of construction operations by others;
- providing labour, or the labour of others, for the carrying out of construction operations.
This also includes a contract for architectural, design, or surveying work or to provide advice on building, engineering, interior or exterior decoration or on the laying-out of landscape in relation to construction operations.
The contract does not have to be in writing. The Act only applies to projects in England, Scotland and Wales (and not to contracts entered into in the UK for construction projects to be built outside of the UK). Scotland and Northern Ireland are governed by similar legislation and have their own versions of the Scheme.
What are "construction operations"?
The meaning of construction operations is set out in Section 105 of the Construction Act. It worth double checking whether your contract is a contract for "construction operations" prior to adjudication and to take advice on that as needed.
There are exceptions in Section 105 of the Act for works which are not "construction operations" including for example, drilling/extraction of oil/natural gas: extraction of minerals and certain activities in relation to nuclear processing, power generation, water and effluent treatment.
Notably, the manufacture or delivery to site of building or engineering components or equipment, materials, plant or machinery, or components for certain systems (e.g. heating) are not construction operations unless the contract also provides for their installation. This means that supply only contracts are not governed by the Act.
Sometimes a contract which is not governed by the Act includes a clause by which both parties have agreed that any dispute may be referred to adjudication which will be contractually binding.
However, in the absence of this, there has been debate as to whether third party rights under the Contracts (Rights of Third Parties) Act 1999 as rights under this Act and collateral warranties are "construction contracts" under the Act.
It was established in Hurley Palmer Flatt Ltd v Barclays Bank Plc  EWHC 3042 (TCC) that a separate right of adjudication would need to be agreed in favour of the third-party and one would not be implied under third party rights pursuant to the Contracts (Rights of Third Parties) Act 1999.
In the recent Court of Appeal case of Abbey Healthcare (Mill Hill) Limited v Simply Construct (UK) LLP, it was confirmed that a collateral warranty can be a contract for "construction operations". Where the collateral warranty states that the warrantee was carrying out and will continue to carry out construction operations (i.e. a future promise), this amounts to a promise in relation to the ongoing carrying out of construction operations.
The Court of Appeal held this means it will likely be a construction contract for purposes of the Act. The case held that it does not matter that the collateral warranty does not contain detailed payment provisions (the promise to pay £1 was sufficient).