Resolving biomass disputes

Statutory adjudication is automatic on construction projects, but does not apply to building or upgrading power plants. Except there are exceptions to that exception. Theresa Mohammed explains.

Advising clients on appropriate forms of dispute resolution is a common feature of the construction and energy sector. Most of us would hope that disputes could be avoided, but it is always important to know what you can do if there is no way to settle conflicts or serious disagreements between the parties.

That said, there are technical quirks to the different forms of dispute resolution because not all forms are available, regardless of the type of contract entered into. Common mistakes that are made are that amendments to disputes clauses are blindly copied over from contract to contract or that parties ignore those clauses, because they assume they can use any form of dispute resolution at any time to resolve disputes.

Certainly in construction, adjudication is frequently used to settle disputes with, the parties having the residual option of litigation or arbitration. For many, adjudication is seen as quick and cost-effective and this far outweighs spending months – or even years – pursuing a claim in court or at arbitration. For this reason local authorities and developers have routinely gone to adjudication to resolve issues they have with contractors and vice versa. The belief is that it sorts the problem out on an interim basis and allows the project to continue moving towards completion.

As the energy sector has grown and local authorities have been in negotiations with energy companies over large-scale combined heat and power upgrades and biomass plants, it has become apparent that parties who have become familiar with construction adjudication are now looking to use it to resolve issues under their energy contracts.

Adjudication can either be contractual or, if the contract concerns what is termed “construction operations”, pursuant to statute and adjudication provisions that comply with the new Construction Act. One of the reasons the Construction Act is particularly relevant is that parties do not have to set out their own adjudication provisions, because they can rely on what is implied by the Scheme for Construction Contracts and can refer disputes to adjudication at any time. This has resulted in many parties working on the assumption that adjudication of some sort will be available to them as long as they are building something, and they do not need to worry about amendments to their dispute clauses.

However, statutory adjudication, which many local authorities will have used over and over on infrastructure or refurbishment contracts, is available only to contracts that concern “construction operations”. If the contract does not fall within this definition, statutory adjudication is not available, and this has prompted concern to those building biomass plants.

The reason for this concern is s105(2) of the Construction Act, which deals with exceptions to “construction operations”. This includes “assembly, installation or demolition of plant or machinery, or erection or demolition of steelwork for the purposes of supporting or providing access to plant or machinery, on a site where the primary activity is

(i) nuclear processing, power generation or water or effluent treatment…”

This means that if you have ignored your dispute resolution clauses, you may find that adjudication cannot be implied by statute. This means that, save for a hastily drafted amendment to insert contractual adjudication, you will be left with litigation or arbitration, which could be a lengthy and costly process. Further still, while s105(2) may appear to offer clarity as to what will and will not fall within “construction operations”, it can become more complicated when a contractor is engaged to provide a range of services and the primary activity on a site is not power generation.

That was the issue that arose in a recent case Laker Vent Engineering Limited v Jacobs E&C, which was before the Technology and Construction Court recently. The dispute concerned a large site in Scotland that contained a paper factory and its own power plant. In 2008 it was agreed that a new £200 million biomass plant would be built on the site, replacing the existing coal and gas plant, and that green electricity would be exported to Scotland’s main grid. Laker commenced three adjudications in accordance with the Construction Act and the parties agreed that all three decisions would be delivered by 7 January 2014.

The adjudicator found for Laker, which included a decision that it was owed £808,000 plus VAT, and it applied to the court for enforcement of those decisions. Jacobs resisted enforcement and one of the grounds it relied upon was that there was no construction contract because power generation was the primary activity of the site. If Jacobs’ position was correct, that would mean that this contract was exempt from statutory adjudication and the three adjudications that had been pursued could not be enforced. This would obviously be a serious consequence if after three adjudications and a court hearing the parties were to find out that the wrong form of dispute resolution had been used.

After careful consideration, Mr Justice Ramsey held that it was necessary to look at the whole site and to consider: who owned the site; the proportion of the site being worked on in respect of the biomass plant; the location of the plant; and the overall impression of the project. Significantly, it was shown that the plant had a limited life span, was not an independent power station, and the leased land where the biomass was to be built comprised 10 per cent of the whole site and was described as a “part” of the paper mill. On this basis it was held that the primary activity was paper manufacture and that the parties had a construction contract.

This was one of the reasons that Laker could enforce the decisions and is an important re-examination of the application of adjudication in the energy sector. The broad view that has been taken could be useful for parties working on biomass plants and energy upgrade works that are part of larger, complex sites, and could offer them the rough-and-ready justice their construction peers already have at their disposal.

Theresa Mohammed, lawyer, Trowers & Hamlins