Engie v MW High Tech Projects[1] is the latest in a long line of cases arising from the construction and/or operation of Energy from Waste (EfW) plants. In this case, O’Farrell J has ruled that adjudicators’ awards cannot be enforced due to an exclusion in the Construction Act in respect of power generation activities.
The adjudication regime
The effect of section 108 of the Housing Grants, Construction and Regeneration Act 1996 (as amended) (the “Act”) is to give parties to construction contracts the right to refer a dispute to adjudication “at any time”.
As set out in section 104 of the Act, a construction contract is
“an agreement with a person for any of the following-
- the carrying out of construction operations;
- arranging for the carrying out of construction operations by others, whether under sub-contract to him or otherwise;
- providing his own labour, or the labour of others, for the carrying out of construction operations”.
The statutory right for parties to construction contracts to refer a dispute to adjudication is unambiguous and cannot be contracted out. There are, however, a number of statutory exclusions, including contracts for the “assembly, installation or demolition of plant or machinery… on a site where the primary activity is… power generation…” (the “power generation exclusion”).
The facts
Engie was engaged as a subcontractor by MW for the installation of the gasification plant at the Energy Works Hull plant. The subcontract provided that the parties could refer disputes to adjudication at any time, but only to the extent required by the Act. The right to refer disputes to adjudication was therefore limited by the statutory bounds (including the power generation exclusion).
In March 2019, Energy Works (Hull) Ltd (MW’s employer) terminated the contract in respect of the EfW plant (the “EPC Contract”) and, subsequently, two separate disputes arose between Engie and MW regarding interim payment applications. Later in 2019, Engie referred the disputes to separate adjudications. The adjudicators ordered MW to pay Engie the combined sum of £367,723.85 plus VAT. MW failed to pay such sums leading Engie to consolidate the claims and apply for enforcement.
MW argued that the adjudicators lacked jurisdiction. It submitted that the subcontract was for the installation of plant on a site where the primary activity was power generation. On that basis, the power generation exclusion under the Act was applicable and Engie had no statutory or contractual right to adjudicate.
Meanwhile, Engie argued that the site’s primary activity was the disposal and thermal treatment of waste. The generation of electricity was merely an ancillary enterprise. It was left to O’Farrell J to determine whether the power generation exclusion under the Act applied.
The judgment
It was mutually agreed that the site’s activities included both waste disposal/treatment and power generation, and thus the Court was only concerned with which of these activities was ‘primary’. Previous cases had determined that whether power generation was the primary activity was a question of fact, and that the following factors should be considered:
- the regulatory framework and policy background;
- the Local Planning Authority’s decision, granting planning permission for the plant;
- the Environment Agency’s grant of a permit for the facility;
- operations on the site, having regard to the requirements of the EPC Contract and the subcontract; and
- the financial model for the plant, the sources of investment capital and income from the plant, including the renewable energy subsidy and grant awarded to the project.
Neither the regulatory framework nor the planning permission decision proved determinative of the site’s main activity. O’Farell J adjudged that the site’s primary activity was power generation for the following reasons:
- The overriding contractual requirement of the EPC Contract was for the facility to operate as a power plant. The performance of the plant is measured by reference to heat and energy production, rather than waste throughput.
- It was a requirement of the EPC Contract that MW achieve ‘R1 status’ for the plant (R1 status indicating that a plant can generate energy with ‘high efficiency’). R1 status could only be achieved if the primary purpose of the plant was energy recovery (not waste disposal).
- The funding model, which estimated a majority of the revenue would be generated by the sale of electricity, served as a strong indication that the owner intended to generate profit by running the facility as a power plant.
Engie’s claims were consequently dismissed.
Commentary
While judges and commentators have questioned the soundness behind the list of activities excluded from mandatory adjudication in the Act, particularly when faced with hybrid contracts covering a number of activities, these exclusions continue to apply and need to be grappled with. Any contractual right to adjudicate must therefore be drafted so as not to allow the statutory ‘carve outs’ from taking effect against the intended contractual position.
Clients on large projects will be well-advised to ensure the right to adjudicate is unambiguous, not only in their main contracts but in any key subcontracts, if this dispute resolution procedure is desired. Parties should also consider carefully whether their existing contracts relating to EfW plants (or to any of the other excluded activities under the Act) confer or withhold the right to adjudication.
Our Infrastructure and Construction teams have significant experience drafting and advising on contracts relating to EfW projects, including EPC contracts. Our specialist adjudication unit, SP Adjudication, is on hand to assist with disputes relating to the same. Our contact details are below – please do not hesitate to get in touch.
This article is for general awareness only and does not constitute legal or professional advice. The law may have changed since this page was first published. If you would like further advice and assistance in relation to any of the issues raised in this article, please contact us today by telephone or email enquiries@sharpepritchard.co.uk
[1] Engie Fabricom (UK) Limited v MW High Tech Projects UK Limited [2020] EWHC 1626
