The Wedge (Part 2)
The Implications
This article details the commercial implications of the ABB Case, and should be read in conjunction with Part 1.
Section 105(2)(c) of the Act suggests that construction contracts for the installation of plant related to power generation would not need to consider the provisions of the Act.1 The ABB Case distills the elements of the exclusion into the ?installation? of items considered to be ?plant? onto a ?site? whose primary activity or primary purpose is one of those listed, including power generation. Judge Bowsher did not delve in detail into the question of what activities might constitute ?installation? or ?plant?, but in both cases adopted a generous definition. In the case of ?plant?, Judge Bowsher indicated that the overall work should be considered and that the use of the relevant material was an important element of the analysis of its nature. ?The drum of cable on the floor is just a piece of material. When the cable is worked into the plant or even joins two pieces of plant it becomes part of the plant and is properly referred to as plant. Similarly, a screw is just a screw when it is in the engineer's pocket, but it becomes part of the plant when he screws it into the generator.?2
The ABB Case turned on the interpretation of the ?site? whose primary activity is power generation. Judge Bowsher held that ?one has to look to the nature of the whole site and ask what is the primary purpose of the whole site.?3 In the ABB Case, power generation plant was installed on a site whose primary purpose was printing magazines, therefore not judged to be within the section 105(2)(c) exclusion. The new interpretation of the meaning of the ?site? of the project, adopted in the ABB Case, makes it difficult to tell which construction contracts will be caught by the Act.
Potential new applications of the Act
Certain installation works, which might normally be considered power generation, may now be subject to the Act. Works subject to the Act under the ABB Case decision might include the installation of generators for industrial purposes, inset or captive power plants, and power plants that also produce some other service or generate some other offtake.
UPS and captive power plants
Certain industrial and commercial activities require a power supply that will not be affected by difficulties with, or shortcomings of, the local grid. One way of protecting these activities from loss of power involves the installation of on-site switchgear and generators to provide an uninterruptible power supply (?UPS?). UPS is commonly used in office buildings, application hosting facilities, hospitals and manufacturing facilities.
In similar circumstances, the developer may choose to install an inset or captive power plant. This is an electricity generation facility that is specific to the industrial or commercial operation in question. For example, steel plants often include a captive power plant because of the amount of electricity which they require for the relevant processes and the relative expense of purchasing electricity from the local grid. The developer of the steel plant will build a power generation facility adjacent to the steel plant, or ?inside the fence?, whose electricity generation is committed to the requirements of the steel plant.
Desalination plants are another example of an electricity intensive process which often involves a captive power plant. Because of the amount of electricity required in certain desalination processes, most desalination facilities will include a captive power generator. Captive power plants may also be used for an entire industrial estate, often where the local grid does not provide a sufficiently consistent source of electricity or where electricity prices are relatively high.
In the case of both UPS and captive power generation, the primary purpose of the site on which such facilities are located (using the definition from the ABB Case) is not power generation, but rather the provision of commercial or industrial services. Therefore, following the ABB Case, the construction of such power generation facilities may not benefit from the section 105(2)(c) exclusion.4
CHP and co-generation
Extrapolating from this new interpretation of the primary purpose of the site, other facilities which would normally be considered power generation facilities may not actually benefit from the section 105(2)(c) exclusion under the Act. For example, combined heat and power (?CHP?) plants involve the generation of power and the generation of heat. Co-generation plants involve the generation of electricity as well as another output, such as steam or hot water. Following the rationale of the ABB Case, the primary purpose of these types of power plant may be the creation of heat or steam or some other output. In such case, CHP and co-generation plants may not benefit from section 105(2)(c).5
Other power generation facilities
A similar argument could be made in relation to other plant normally associated with power generation, such as a hydro-electric plant (where the primary purpose of the site may be water storage or water management), waste-to-energy plants6 (where the primary purpose is the incineration of waste), and tyre pyrolisys (where the primary purpose is the disposal of tyres). Following the ABB Case, these projects may not benefit from the section 105(2)(c) exclusion under the Act.7
Potential new exclusions
The ABB Case states that plant installed on a site, where the primary purpose of the site is the generation of electricity, falls within the section 105(2)(c) exclusion under the Act. It is an open question whether the ?plant? in this context is limited to plant specific to power generation. Works which may now be excluded from the Act include plant related to power generation, plant which is ancillary to power generation, and plant which is located on a site whose primary purpose is power generation but is not directly related to the generation of power.
Power generation plant
As was confirmed in the ABB Case, cabling and switchgear installed in a power generation plant would be caught by this interpretation of ?site?. Under this same reasoning the section 105(2)(c) exclusion would also apply to contracts for the installation of air conditioning plant, elevators, computer systems and other extraneous plant on a power generation site.8
Ancilliary plant
Similarly, other ancillary plant installed on the site of a power generation facility would benefit from the exclusion. For example, a water treatment plant for the water to be used in the boiler, or ash storage or handling equipment for residue from the power plant, and any transport systems for fuel or other resources may well fall within the section 105(2)(c) exclusion. Under the same logic, mine mouth power plants, where a power plant is located at the mouth of a coal mine and the coal is used exclusively or primarily for fuelling the plant, may well under the rationale of the ABB Case fall under the section 105(2)(c) exclusion, since the primary purpose of the site will be the generation of power. Therefore the construction contracts for the installation of mining plant and other associated facilities may not be caught by the Act.9
Unrelated plant
Extrapolating further using the same rationale, plant (such as sewage treatment, heating, or computer facilities) installed in housing facilities, office facilities and other facilities on the site of the power generator, but which is not necessarily integral to the act of generation of power, could also benefit from the section 105(2)(c) exclusion under the Act.10
Conclusion
The decision in the ABB Case throws up a number of ? probably unintended ? potential implications. However, the current situation is not surprising in view of the confusion surrounding the purpose and intention of the section 105(2)(c) exclusion. The exclusion could relate to power generation plant, or any plant located on a site whose primary purpose is power generation. If Parliament intended to focus on the nature of the ?plant? it would have specified ?power generation plant?, but it did not. Instead it focused on the nature of the site, hence Judge Bowsher's decision, a legally accurate but potentially commercially impractical ruling.
Developers and lenders will normally prefer to avoid certain provisions of the Act. For example, they may want to permit pay-when-paid clauses, to avoid suspension on non-payment and to avoid fast-track resolution of disputes under adjudication. However, the ABB Case makes it difficult for developers and lenders to assess which projects will permit them to avoid application of the Act. The careful lawyer will, when faced with such lack of guidance, always take the more cautious road and assume that the Act will apply, but this may not serve the best interests of his developer and lender clients.
The parties did not seek leave to appeal the ruling in the ABB Case, therefore further clarification of this interpretation of the Act may be long in coming.
Footnotes
1 The scope of works under the construction contract would need to be limited to the installation of plant in compliance with the exclusion under section 105(2)(c). Where any other construction operations (as defined in the Act) are included in the contract, the Act would apply to the contract. Therefore, the exclusion would not normally apply to turnkey and other construction contracts that include ?construction operations? as well as installation of plant.
2 [2001] B.L.R. 66 at para. 27.
3 [2001] B.L.R. 66 at para. 34.
4 Of course, steel plants and desalination facilities may satisfy the section 105(2)(c) exclusion as a site where the primary activity is the production of steel and water treatment, respectively.
5 Current CHP and cogeneration projects in the UK include Shotton Power, to supply the Shotton Paper Mill with steam and electricity, Eni-Chem to supply the requirements of a synthetic rubber manufacturing facility, SmithKline CHP to supply the SmithKline Beecham Pharmaceuticals plant in Irvine and the South Killinghome CHP to supply the needs of the Conoco Humber Refinery and the Lindsay Oil Refinery at South Killingholme. These plants range in size from 45 MW to 475 MW and represent significant investment and generating capacity. Of course, the primary activity of the ?site? of the relevant facility may fall under one of the other activities set out in section 105(2)(c) and therefore benefit from the exclusion.
6 Waste-to-energy (where waste is incinerated and the resultant heat is used to generate electricity) is of particular importance in the UK. Though uptake to date has been limited, with notable recent exceptions such as the Sheffield and Isle of Man waste-to-energy plants, the recent European Landfill Directive (1999/31/EC) is forcing the UK to rethink their approach to waste disposal and to seek alternative methods of disposal, such as waste-to-energy.
7 It should be noted that in the case of Palmers Limited v. ABB Power Construction Limited 1999 WL 477465, [1999] BLR 426, 68 CON.L.R.52, the TCC decided that the installation of a boiler onto a co-generation plant satisfies the power generation exclusion under the Act. (?The Palmers Case?)
8 Though the Palmers Case did not address the issue of section 105(2)(c) specifically, the installation of scaffolding on the site of a co-generation power plant was considered to be caught by the Act.
9 Of course, facilities for treating or managing water, chemicals, oil, gas or other aspects of the project may satisfy other elements of section 105(2)(c) and therefore the relevant contract may not be subject to the Act.
10 This potential application of the ABB Case should be considered in light of paragraph 34 of the decision in The Palmer Case, where the court held that ?scaffolding which is preparatory to an excluded construction operation [under section 105(2)] may, nonetheless, itself be a construction operation [under section 105(1)]?
This article details the commercial implications of the ABB Case, and should be read in conjunction with Part 1.
Section 105(2)(c) of the Act suggests that construction contracts for the installation of plant related to power generation would not need to consider the provisions of the Act.1 The ABB Case distills the elements of the exclusion into the ?installation? of items considered to be ?plant? onto a ?site? whose primary activity or primary purpose is one of those listed, including power generation. Judge Bowsher did not delve in detail into the question of what activities might constitute ?installation? or ?plant?, but in both cases adopted a generous definition. In the case of ?plant?, Judge Bowsher indicated that the overall work should be considered and that the use of the relevant material was an important element of the analysis of its nature. ?The drum of cable on the floor is just a piece of material. When the cable is worked into the plant or even joins two pieces of plant it becomes part of the plant and is properly referred to as plant. Similarly, a screw is just a screw when it is in the engineer's pocket, but it becomes part of the plant when he screws it into the generator.?2
The ABB Case turned on the interpretation of the ?site? whose primary activity is power generation. Judge Bowsher held that ?one has to look to the nature of the whole site and ask what is the primary purpose of the whole site.?3 In the ABB Case, power generation plant was installed on a site whose primary purpose was printing magazines, therefore not judged to be within the section 105(2)(c) exclusion. The new interpretation of the meaning of the ?site? of the project, adopted in the ABB Case, makes it difficult to tell which construction contracts will be caught by the Act.
Potential new applications of the Act
Certain installation works, which might normally be considered power generation, may now be subject to the Act. Works subject to the Act under the ABB Case decision might include the installation of generators for industrial purposes, inset or captive power plants, and power plants that also produce some other service or generate some other offtake.
UPS and captive power plants
Certain industrial and commercial activities require a power supply that will not be affected by difficulties with, or shortcomings of, the local grid. One way of protecting these activities from loss of power involves the installation of on-site switchgear and generators to provide an uninterruptible power supply (?UPS?). UPS is commonly used in office buildings, application hosting facilities, hospitals and manufacturing facilities.
In similar circumstances, the developer may choose to install an inset or captive power plant. This is an electricity generation facility that is specific to the industrial or commercial operation in question. For example, steel plants often include a captive power plant because of the amount of electricity which they require for the relevant processes and the relative expense of purchasing electricity from the local grid. The developer of the steel plant will build a power generation facility adjacent to the steel plant, or ?inside the fence?, whose electricity generation is committed to the requirements of the steel plant.
Desalination plants are another example of an electricity intensive process which often involves a captive power plant. Because of the amount of electricity required in certain desalination processes, most desalination facilities will include a captive power generator. Captive power plants may also be used for an entire industrial estate, often where the local grid does not provide a sufficiently consistent source of electricity or where electricity prices are relatively high.
In the case of both UPS and captive power generation, the primary purpose of the site on which such facilities are located (using the definition from the ABB Case) is not power generation, but rather the provision of commercial or industrial services. Therefore, following the ABB Case, the construction of such power generation facilities may not benefit from the section 105(2)(c) exclusion.4
CHP and co-generation
Extrapolating from this new interpretation of the primary purpose of the site, other facilities which would normally be considered power generation facilities may not actually benefit from the section 105(2)(c) exclusion under the Act. For example, combined heat and power (?CHP?) plants involve the generation of power and the generation of heat. Co-generation plants involve the generation of electricity as well as another output, such as steam or hot water. Following the rationale of the ABB Case, the primary purpose of these types of power plant may be the creation of heat or steam or some other output. In such case, CHP and co-generation plants may not benefit from section 105(2)(c).5
Other power generation facilities
A similar argument could be made in relation to other plant normally associated with power generation, such as a hydro-electric plant (where the primary purpose of the site may be water storage or water management), waste-to-energy plants6 (where the primary purpose is the incineration of waste), and tyre pyrolisys (where the primary purpose is the disposal of tyres). Following the ABB Case, these projects may not benefit from the section 105(2)(c) exclusion under the Act.7
Potential new exclusions
The ABB Case states that plant installed on a site, where the primary purpose of the site is the generation of electricity, falls within the section 105(2)(c) exclusion under the Act. It is an open question whether the ?plant? in this context is limited to plant specific to power generation. Works which may now be excluded from the Act include plant related to power generation, plant which is ancillary to power generation, and plant which is located on a site whose primary purpose is power generation but is not directly related to the generation of power.
Power generation plant
As was confirmed in the ABB Case, cabling and switchgear installed in a power generation plant would be caught by this interpretation of ?site?. Under this same reasoning the section 105(2)(c) exclusion would also apply to contracts for the installation of air conditioning plant, elevators, computer systems and other extraneous plant on a power generation site.8
Ancilliary plant
Similarly, other ancillary plant installed on the site of a power generation facility would benefit from the exclusion. For example, a water treatment plant for the water to be used in the boiler, or ash storage or handling equipment for residue from the power plant, and any transport systems for fuel or other resources may well fall within the section 105(2)(c) exclusion. Under the same logic, mine mouth power plants, where a power plant is located at the mouth of a coal mine and the coal is used exclusively or primarily for fuelling the plant, may well under the rationale of the ABB Case fall under the section 105(2)(c) exclusion, since the primary purpose of the site will be the generation of power. Therefore the construction contracts for the installation of mining plant and other associated facilities may not be caught by the Act.9
Unrelated plant
Extrapolating further using the same rationale, plant (such as sewage treatment, heating, or computer facilities) installed in housing facilities, office facilities and other facilities on the site of the power generator, but which is not necessarily integral to the act of generation of power, could also benefit from the section 105(2)(c) exclusion under the Act.10
Conclusion
The decision in the ABB Case throws up a number of ? probably unintended ? potential implications. However, the current situation is not surprising in view of the confusion surrounding the purpose and intention of the section 105(2)(c) exclusion. The exclusion could relate to power generation plant, or any plant located on a site whose primary purpose is power generation. If Parliament intended to focus on the nature of the ?plant? it would have specified ?power generation plant?, but it did not. Instead it focused on the nature of the site, hence Judge Bowsher's decision, a legally accurate but potentially commercially impractical ruling.
Developers and lenders will normally prefer to avoid certain provisions of the Act. For example, they may want to permit pay-when-paid clauses, to avoid suspension on non-payment and to avoid fast-track resolution of disputes under adjudication. However, the ABB Case makes it difficult for developers and lenders to assess which projects will permit them to avoid application of the Act. The careful lawyer will, when faced with such lack of guidance, always take the more cautious road and assume that the Act will apply, but this may not serve the best interests of his developer and lender clients.
The parties did not seek leave to appeal the ruling in the ABB Case, therefore further clarification of this interpretation of the Act may be long in coming.
Footnotes
1 The scope of works under the construction contract would need to be limited to the installation of plant in compliance with the exclusion under section 105(2)(c). Where any other construction operations (as defined in the Act) are included in the contract, the Act would apply to the contract. Therefore, the exclusion would not normally apply to turnkey and other construction contracts that include ?construction operations? as well as installation of plant.
2 [2001] B.L.R. 66 at para. 27.
3 [2001] B.L.R. 66 at para. 34.
4 Of course, steel plants and desalination facilities may satisfy the section 105(2)(c) exclusion as a site where the primary activity is the production of steel and water treatment, respectively.
5 Current CHP and cogeneration projects in the UK include Shotton Power, to supply the Shotton Paper Mill with steam and electricity, Eni-Chem to supply the requirements of a synthetic rubber manufacturing facility, SmithKline CHP to supply the SmithKline Beecham Pharmaceuticals plant in Irvine and the South Killinghome CHP to supply the needs of the Conoco Humber Refinery and the Lindsay Oil Refinery at South Killingholme. These plants range in size from 45 MW to 475 MW and represent significant investment and generating capacity. Of course, the primary activity of the ?site? of the relevant facility may fall under one of the other activities set out in section 105(2)(c) and therefore benefit from the exclusion.
6 Waste-to-energy (where waste is incinerated and the resultant heat is used to generate electricity) is of particular importance in the UK. Though uptake to date has been limited, with notable recent exceptions such as the Sheffield and Isle of Man waste-to-energy plants, the recent European Landfill Directive (1999/31/EC) is forcing the UK to rethink their approach to waste disposal and to seek alternative methods of disposal, such as waste-to-energy.
7 It should be noted that in the case of Palmers Limited v. ABB Power Construction Limited 1999 WL 477465, [1999] BLR 426, 68 CON.L.R.52, the TCC decided that the installation of a boiler onto a co-generation plant satisfies the power generation exclusion under the Act. (?The Palmers Case?)
8 Though the Palmers Case did not address the issue of section 105(2)(c) specifically, the installation of scaffolding on the site of a co-generation power plant was considered to be caught by the Act.
9 Of course, facilities for treating or managing water, chemicals, oil, gas or other aspects of the project may satisfy other elements of section 105(2)(c) and therefore the relevant contract may not be subject to the Act.
10 This potential application of the ABB Case should be considered in light of paragraph 34 of the decision in The Palmer Case, where the court held that ?scaffolding which is preparatory to an excluded construction operation [under section 105(2)] may, nonetheless, itself be a construction operation [under section 105(1)]?
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