What is a hybrid contract?
Where contracts cover both construction operations within the meaning of section 105(1) and operations excluded by section 105(2) of the Housing Grants, Construction and Regeneration Act (1996) ('the Act')) they are referred to as 'hybrid' contracts.
As everyone is aware, when distinguishing between construction and non-construction operations, we consider the exclusions under section 105(2). The Act excludes the "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, or (ii) the production, transmission, processing or bulk storage (other than ware-housing) of chemicals, pharmaceuticals, oil, gas, steel or food and drink."
The Courts have explored and deliberated the definitions of each section 105(2) exclusion in great detail. However, our focus is on the implications of excluding Act-compliant payment mechanisms in the context of hybrid contracts.
The Traditional Approach
The traditional approach adopted by the Courts on payment within hybrid contracts is such that the construction and non-construction operations are dealt with separately by incorporating individual payment mechanisms within any contract. As such if one invoice is issued covering the works, a distinction must be made between the payment of construction and non-construction operations. This was reverberated in the case of Severfield (UK) Limited v Duro Felguera UK Limited  EWHC 3352 (TCC), 2015 WL 7259194, where Coulson LJ considered payment under a hybrid contract to:
"… have run counter to s. 104 (5), which expressly provides that the provisions in the Act apply “only so far as” they relate to construction operations; and secondly, ignores the fact that the parties have expressly agreed a different payment regime. In my view, the court must uphold that different regime in respect of all claims to payment in respect of works which are excluded by the 1996 Act"
To avoid any ambiguity and consequently failure to comply with the Act as to whether a payment application deals with the construction or non-construction operations, it is essential for the payment application to stipulate the construction operations for which remuneration is sought. This was further considered by Coulson LJ:
"All of these cases concern the situation where the contractor is seeking to take advantage of the absence of any notices from the employer to claim, as of right, the sum originally notified. That approach is in accordance with the amended provisions of the 1996 Act. But because of the potentially draconian consequences, the TCC has made it plain that the contractor's original payment notice, from which its entitlement springs, must be clear and unambiguous. Thus:
(a) In Caledonian Modular Limited v Mar City Developments Limited  EWHC 1855 (TCC), at paragraph 37, I said:
“…if contractors want the benefit of these provisions, they are obliged, in return, to set out their interim payment claims with proper clarity. If the employer is to be put at risk that a failure to serve a payless notice at the appropriate time during the payment period will render him liable in full for the amount claimed, he must be given reasonable notice that the payment period has been triggered in the first place.”
(b) In Henia Investments v Beck Interiors Limited  EWHC 2433 (TCC) Akenhead J said:
“…the document relied upon as an Interim Application … must be in substance, form and intent an Interim Application stating the sum considered by the Contractor as due at the relevant due date and it must be free from ambiguity. In this context, the Interim Application should be considered in the same light as a certificate. If there are to be potentially serious consequences flowing from it being an Interim Application, it must be clear that it is what it purports to be so that the parties know what to do about it and when.”"
The Modern Approach
In the recent case of C Spencer Ltd v MW High Tech Projects UK Ltd  EWHC 2547 (TCC), O'Farrell J's found that where a hybrid contract contains a single Act-compliant payment regime, it was unnecessary for a payment notice to set out the sums due for construction operations separately from the sums due for non-construction operations. Under a hybrid contract, if a payment notice complies with both the contractual and statutory requirements (which are the same), it will be valid. However, O'Farrell J's cautioned that it will be necessary to construe each payment notice on its facts, to ensure it is "sufficiently clear and unambiguous in form, substance and intent so that the parties have proper notice of the sum assessed as due and the basis of the calculation". Therefore, it is still necessary to apportion sums between construction and non-construction operations, as certain circumstances can undermine the validity of the overall assessment, due to a defective notice.
The Court of Appeal has upheld O'Farrell J's first instance finding that, under a hybrid contract, it was unnecessary for a payment notice to distinguish between the amounts claimed for construction operations and non-construction operations. In giving the leading judgment, Coulson LJ said:
The Act and Scheme only apply in a default scenario to construction operations. It is therefore prudent that a hybrid contract clearly sets out the payment mechanism to be relied on by the parties. You cannot contract out of the Act where construction operations are carried out. However, you can contract into the Act in a hybrid contract.
If you would like to discuss any of the points raised in this article or to find out more about the NEC training course, please contact David Mcneice.