In this series first blog (Disputes in Modular Construction), we discussed the increase in popularity of modular construction as well as its current and potential impact on construction disputes. In this blog we focus on 'smash and grab' payment disputes and the application of the implied Scheme for Construction Contracts in projects with a modular element.
Smash and grab?
Since the introduction of the Housing Grants, Construction and Regeneration Act 1996 ('the Act'), 'smash-and-grab' adjudications have been used by parties to a construction contract to obtain payment where there has been a failure in the payment process.
Nevertheless, payment disputes involving offsite construction may not always be dealt with in the same way as those involving traditional construction. Off-site manufacturing does not fall within the definition of a "construction operation" under section 105 of Act, therefore in certain projects utilising modular construction, the Scheme(s) for Construction Contracts Regulations 1998 might not imply the right to: (1) adjudication, or (2) to be paid via interim, periodic or stage payments; into a contract or sub-contract where it is not specified. This would mean a smash and grab would not be available to, for example, a modular supplier, and expensive litigation may be required to secure payment. However, where a contract also includes for installation of the modular element, then the Act would bite. The analysis may also be different between the main contractor and sub-contractor (see Palmers Ltd vs ABB Power Construction Ltd  BL 426 (TCC)).
To make matters more complex, more traditional elements of construction work falling within the definition of "construction operations" can be severed from other aspects of the contract where this involves, for example, fabrication or manufacturing (see Palmers). In those circumstances a decision maker could treat the “construction operations” part of the contract as severable from the rest when implying the Scheme's adjudication provisions and payment mechanisms into a parties' contract.
Issues in practice
There are various ways this might play out in practice. For example, where a contractual payment mechanism is defective in terms of the Act, the contractual mechanism could apply to modular elements and the Scheme could apply to traditional construction operations, which will no doubt cause confusion and complications when applying for payments.
It could also cause issues in pursuing a smash and grab. If an interim application contains a total claim including both construction operations and manufacturing operations, then the sum claimed cannot be the 'notified sum' for the purpose of the Act and subsequent adjudication (see Severfield (UK) Ltd v Duro Felguera UK Ltd  EWHC 3352 (TCC)). This is because the sums claimed for manufacturing operations would be excluded from the notified sum. That notified sum cannot be retrospectively amended to cure the issue for a smash and grab.
It may also result in being successful in a smash and grab but with an unenforceable adjudicator's decision. In Cleveland Bridge (UK) Limited v Whessoe-Volker Stevin Joint Venture  EWHC 1076 (TCC) the court decided that where an adjudicator decides a whole dispute containing both construction and non-construction operations, it will not be severable and the decision will be unenforceable for lack of jurisdiction. In order for the decision to be enforceable there should be a decision on the part of the dispute involving construction operations, being within the adjudicator's jurisdiction.
Parties may therefore find themselves in litigation to obtain payment or to ascertain whether, all, or part of, their contract is subject to the payment and adjudication provisions of the Act. Until a legislative solution is enacted, complex and costly litigation may be the primary avenue to resolve disputes involving modular elements.
These complexities should be borne in mind by parties considering a smash and grab adjudication, where various challenges could be made as the result of some or all of the works in question being characterised as manufacturing. Parties should monitor the different elements of their projects and how payment operates for each. Unlike the components of modular building, no two examples of construction operations are identical, and the courts continue to make clear the fact-sensitive nature of any enquiry.
For all parties concerned, if there is a question over whether a contract relates to “construction operations”, both payment and the right to adjudication should be examined. This will ensure that any disputes do not get off to a false start because of a mischaracterisation.