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When is a commercial contract a “construction contract” and why does it matter?

We explain when a commercial contract becomes a construction contract. The answer may take you by surprise.

Part II of the Housing Grants, Construction and Regeneration Act 1996 defines a “construction contract”. The definition is wide and may catch a contract that you would consider to be a commercial, rather than a construction, contract. This may, for example, include a contract for the supply, installation and maintenance of machinery. Why does this matter?

Payment provisions and adjudication

The significance of a contract (entered into after 1 October 2011) being treated as a construction contract is that the Act imposes stricter payment obligations on customers and prescribes adjudication as a fast-track dispute resolution mechanism. Both may come as an unwelcome surprise to customers who expected their contract to be a standard commercial contract.

Under the Act:

  • Contractors are entitled to stage payments and benefit from strict mechanisms for payment triggers and dates
  • Parties to a construction contract may refer disputes under the contract to adjudication. Adjudication is more streamlined than other forms of dispute resolution mechanisms and its main aim is to ensure a fast resolution of the dispute and the resumption of the contract at hand.

What is a construction contract?

The Act provides that a contract is a construction contract wherever the subject matter of the contract can be classified as “construction operations”. However, case law in this area is not consistent, particularly on the question of whether equipment is permanently attached to the land.

In Gibson Lea Retail Interiors Ltd v Makro Self Service Wholesalers Ltd [2001], the court found that the shopfitting of display units was not a construction operation because the units were only bolted to the floor to ensure their stability and could be moved easily.

Contrast the more recent case of Savoye and Savoye Ltd v Spicers Ltd [2014], where the judge found that the installation of a conveyor belt system secured to a warehouse floor was a construction operation.

What should you do?

Before entering into a contract the performance of which could give rise to “construction operations”, you should seek legal advice. Contractors will generally be aware of the Act and the protections which it affords to them.

It is not possible to ‘contract out’ of the provisions of the Act, which applies to construction contracts even if not specifically mentioned in the contract. The Act would also apply where the contract purports to exclude it, and it will override any express provisions of the contract which are not consistent with it.

It is worth noting, however, that the Act applies only to those parts of the contract which relate to the carrying out of construction operations and not to the rest of the contract.

If you would like to know more about whether your contract may be governed by the Act, please contact our commercial contract lawyers.

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