The statutory right to adjudicate in energy projects – Battery Energy Storage Systems
Introduction
In this article, we explore how:
The core provisions of the Construction Act may impact the contractual framework for Battery Energy Storage Systems (“BESS”) projects (which became a mainstream technology after the original Construction Act)
Stakeholders can mitigate the risks associated with a hybrid contract
The Construction Act1 has played a vital role in impacting the way the construction industry operates since its introduction almost 30 years ago.
The Construction Act’s main reforms aimed at improving cash flow in the construction industry and focused on:
The mandatory inclusion of payment provisions
The establishment of a swift dispute resolution mechanism tailored to the sector’s needs – being adjudication
The UK construction industry is in a state of constant change due to political and / or economic shifts, or other factors, such as technological development. New and emerging technologies can test existing legal frameworks, raising questions about their application. BESS appear to be a case in point.
For many in the UK construction industry, the statutory payment regime and right to adjudicate are the norm, but certain construction works do not fall within that statutory framework. When the Construction Act was being debated in Parliament, engagement from certain industries resulted in some of the exclusions in the Construction Act’s provisions. This has impacted the Construction Act’s application to some energy projects, and in some instances created confusion and uncertainty. If a contract for construction works only partially falls within the statutory framework, this creates a “hybrid” contract.
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When does the Construction Act apply?
The Construction Act applies to a contract which is a “construction contract” for “construction operations”.
A “construction contract”2 includes:
a) The carrying out of construction operations;
b) Arranging for the carrying out of construction operations by others; and
c) Providing labour for the carrying out of construction operations.
The Construction Act sets out an exhaustive list of what constitutes “construction operations”3 as well as a list of operations which do not fall within the definition of “construction operations”4.
Here, we focus on the power generation exclusion as follows5:
.....
c) 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
…..
Note that, as we will see later, whether this exclusion applies can be a complex question – for example, civil works or enabling works at a site where the primary activity is power generation will not be excluded and will still be subject to the Construction Act.
Overview of BESS projects and hybrid headaches
BESS projects typically consist of large, containerised units, which integrate the essential components such as the battery modules, power conversion systems and control equipment into a single shipping container like package6.
The Courts have tended to adopt a narrow reading of exclusion provisions7 but the point does often involve a fine distinction which turns on the relevant facts. There are decisions where a Court has determined that a contract was within the exclusion of s105(2) of the Construction Act8.
If a construction contract covers both included and excluded “construction operations” but that contract is not fully Construction Act-compliant, a Court will likely apply two separate payment and dispute mechanisms simultaneously: the statutory regime for the included works and the original contractual terms for excluded works9. The contracting parties then may face two different regimes which complicate the administration of the contract and the resolution of disputes arising under it.
Modern BESS projects involve highly integrated civil, electrical, mechanical, and control systems and receive power from the grid as well as discharging it and also can be co-located with solar or wind. This can make it difficult to determine in practice which specific elements qualify as construction operations, and which fall within the exclusions10. A case in Northern Ireland suggested the potential scope for arguing that BESS projects are not considered to be within the class of “electricity generating stations” (and therefore query whether their primary purpose is power generation) on the ground that their role is storage. This also raises a question over co-located BESS/solar projects - different elements of the works may or may not be included in the exclusion wording. However, caution should be exercised in relation to the Northern Ireland decision on the basis that the decision does not strictly relate to the Construction Act and is therefore not necessarily instructive in that context. There is a good chance that the point on whether BESS is power generation / storage comes to be tested in English Courts in due course.
Practical difficulties and risk mitigation
For BESS disputes, a statutory right to adjudicate cannot be assumed11. To the extent that the statutory right to adjudication (or the statutory payment regime) will step in to non-compliant contracts depends on whether the works qualify as "construction operations".
The complex contractual matrix of BESS projects further complicates matters. Many projects include Operation and Maintenance or Long-Term Service Agreements that commence after practical completion or taking-over (as applicable). Parties must carefully consider whether the Construction Act would apply to these agreements.
Ultimately, the classification of the works and the site's primary activity require a detailed, fact-specific analysis. This ambiguity can be used tactically: a party responding to an adjudication may challenge the adjudicator’s jurisdiction.
How to mitigate this risk?
Parties to construction contracts for BESS and co-located projects may wish to consider taking a Construction Act-compliant approach for all payments and following Construction Act processes – with unequivocal reference to adjudication for all disputes. This should reduce the significant time and cost of debating these points and mitigate the risk of potentially having two regimes (statutory and contractual) to different parts of a hybrid contract which could be used for a party’s tactical advantage. This “contracting-in” ensures a single, unified procedure for payment and dispute regimes and creates certainty for the contracting parties.
As Mr Justice Coulson stated:
“Adjudication, both as proposed in the Bill and as something that has now been in operation for almost 20 years, is an effective and efficient dispute resolution process. Far from being a ‘punishment’, it has been generally regarded as a blessing by the construction industry. Furthermore, it is a blessing which needed then - and certainly needs now - to be conferred on all those industries (such as power generation) which are currently exempt. As this case demonstrates only too clearly, they too would benefit from the clarity and certainty brought by the 1996 Act.12”
Conclusion & How we can help
In conclusion, whilst adopting a Construction Act compliant clause appears to be one sensible approach, the position is highly fact dependent and subject to a number of factors to be considered, which places even greater emphasis on taking advice on the provisions to include in each contract.
If you have any queries regarding the contents of this legal article, please get in touch with Sachin Shah, Emily Leonard or another member of our Construction & Engineering team.
Footnotes
Housing Grants, Construction and Regeneration Act 1996 (as amended) (the “Construction Act”)
Section 104(1)
Section 105(1)
Section 105(2)
Section 105(2)(c)(i)
What is a BESS Container? The Heart of Modern Energy Storage - ELEHUB
North Midland Construction Plc v AE & E Lentjes UK Limited (formerly Lentjes UK Limited formerly Lurgi (UK) Limited) [2009] EWHC 1371 (TCC)
Engie Fabricom (UK) Ltd v MW High Tech Projects UK Ltd [2020] EWHC 1626 (TCC)
Severfield (UK) Ltd v Duro Felguera UK Ltd [2015] EWHC 3352 (TCC)
Ibid.
Ibid.
Ibid.
The content of this page is a summary of the law in force at the date of publication and is not exhaustive, nor does it contain definitive advice. Specialist legal advice should be sought in relation to any queries that may arise.
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