Adjudication, Enforcement and Hybrid Contracts

The Technology and Construction Court (‘TCC’) have been required to revisit the issue of the enforceability of adjudication decisions arising from hybrid contracts.

By way of a reminder, the statutory right to adjudicate is conferred by the Housing Grants, Construction and Regeneration Act 1996 (‘the Construction Act’) applies uniquely to ‘construction contracts’.

In order for a contract to fall into that category it must involve ‘construction operations’ for the purposes of Section 104 (1) of the Construction Act.

In the majority of cases that find themselves before the TCC, it is a simple exercise in establishing that this requirement has been met.  However, it is sometimes the case that parties enter into contracts that require the provision of not only construction operations but also other services. Those contracts are known as hybrid contracts.

That was the scenario in Crystal Electronics Limited (‘Crystal’) and Digital Mobile Spectrum Limited (‘DMSL’) [2023] EWHC 2656 (TCC), a case in which His Honour Judge (‘HHJ’) Keyser KC presided.

Here Crystal were engaged by DMSL for the purpose of carrying out ‘proactive and remedial intervention services to address the detrimental effects of 4G mobile broadband services on digital terrestrial television’.

Although the services were not explicitly described in the contract, it was understood that they would follow a tiered process at the address of any customers who had experienced issues with their television in areas where new masts were installed. The process started with identification of the television equipment (including a ‘visual survey’ from the street) and then worked backwards along the television system to identify where the issue lay, ultimately ending at the external aerial outside of the property in cases where the issue was not identified earlier on the system.

In some cases where an issue was identified, the remedial work would merely involve the installation of a filter near the television. Other cases would require external aerial repair to replacement. Some aerial works required operatives to work from heights on the roof of the property.

A payment dispute arose, and Crystal commenced an adjudication for payment of a purported notified sum to the value of £553,336.00 plus VAT (‘the Notified Sum’). DMSL raised a jurisdictional challenge stating that for the purposes of the Construction Act, its contract with Crystal was not a construction contract as none of the works were ‘construction operations’ and that even if some of the works were, others did not fall into the definition in the Construction Act. DMSL argued before the Adjudicator that the contract was a hybrid contract as a result.

Crystal of course contended that this was not the case and said that in any event, the Adjudicator’s jurisdiction was limited in such a way that if any of the works were ‘construction operations’ then the Adjudicator was limited to awarding the Notified Sum. In short, Crystal argued that the Adjudicator was unable to separate the Notified Sum into construction and non-construction operations.

The Adjudicator agreed with Crystal’s submission on jurisdiction and proceeded with the adjudication, ultimately deciding that the Notified Sum was payable.

A second adjudication was commenced by Crystal to the same Adjudicator with a similar outcome, an award for a further notified sum of £219,738.00 plus VAT.

Due to the evidential issues arising, the matter was dealt with at an expedited trial rather than the usual Part 7 Summary Judgment hearing. Ultimately upon enforcement, the TCC decided that the payment applications and contract in question were not substantively related to construction operations.

In order for those works to meet that requirement in the matter at hand, it was important for the services to include works ‘forming part of the land’ for the purposes of Section 105 (1) of the Construction Act. The TCC noted that whilst a ‘fixture’ can form part of the land, a distinction had to be made between buildings and the land itself. In relation to Crystal’s services, it was clear that the works were not sufficiently permanent to form part of the land.

As such, HHJ Keyser took the relatively unusual decision not to enforce the Adjudicator’s decisions, owing to an absence of jurisdiction. Simply put, Crystal had no right to adjudicate the disputes because the subject matter of the adjudications was not related to construction operations.

The Judgment contains an interesting analysis as to when the services being provided under a contract fall foul of the requirement to be substantively construction operations. HHJ Keyser summarises his reasoning for not enforcing Crystal’s claim at paragraph 42 of the Judgment:

“…the evidence shows that at the very least a substantial proportion of the works to which the adjudication decisions related comprised operations that were not construction operations.”

The above is the criteria required by the TCC in order for an Adjudicator to have the requisite jurisdiction as to whether a construction contract is in place.

Points arising/of note:

1. Whilst the majority of adjudication decisions tend be enforced, this should not be taken as a given. Jurisdictional challenges remain crucial to the process and may be relied upon later at enforcement stage.
2. It should not be assumed that a contract provides for construction operations, even if it is clearly the case in part. It is important to understand the context of the services provided and to ensure that they are covered by the Construction Act at the outset of any adjudication.
3. Whether a hybrid contract is governed by the Construction Act appears to hinge on whether the works are substantively construction operations.
4. Where there clearly are construction operations forming part of a hybrid contract, this should be separated where possible from an administrative perspective, particularly in the context of payment documents. This should make it easier to identify which aspects of the works are governed by the Construction Act and which are not.
5. When drafting and agreeing hybrid contracts, parties may wish to remove the uncertainty by adopting the provisions of the Construction Act in relation to the entirety of the contract in question.

For further information and support, please get in touch.