Sustainable aviation fuel projects in the UK: when does the Construction Act apply?

Stepped targets for the use of sustainable aviation fuel (SAF) are now critical to how the aviation industry plans to decarbonise. At EU level, the ReFuelEU Aviation Regulation will require a rising minimum share of SAF from all flights departing from EU airports: rising from 6% in 2030 to 20% in 2035 and to 70% by 2050. The UK government has proposed a 10% SAF mandate by 2030.

These targets have prompted a wave of SAF‑related projects: new production plants, upgrades to existing facilities, additional storage and blending capacity, and related transport and pipeline works.

Complex contracts

SAF projects often involve complex, multi‑disciplinary contracts bringing together design, construction, installation, commissioning, operation and maintenance. Where some or all of that scope falls within the Housing Grants, Construction and Regeneration Act 1996, the contract – or those elements of it – may be treated as a “construction contract”. The result is that parts of the contract can be overridden, in whole or in part, by the Scheme for Construction Contracts (England and Wales) Regulations 1998 (as amended).

It is therefore equally important for both employers and contractors to be clear from the outset whether their agreements – or parts of them – fall under the 1996 Construction Act. A wrong analysis can lead to unintended payment terms being implied into the contract and an increased risk of adjudications, with parties potentially having to navigate two different regimes (contractual and statutory) under a single agreement.

Construction or exclusion?

Section 104 of the Construction Act defines a “construction contract” broadly as contracts relating to construction operations. Section 105 defines “construction operations” widely, including the construction, alteration, and maintenance of buildings and civil engineering structures.

However, section 105(2)(c) sets out a two limb exclusion to “construction operations” that is particularly relevant for energy and SAF projects.

The exclusion applies where the operations comprise the assembly, installation or demolition of plant or machinery, or the erection or demolition of steelwork for supporting or providing access to plant or machinery? It also applies if the operations are carried out on a site where the primary activity is nuclear processing, power generation, or water and effluent treatment – or the production, transmission, processing or bulk storage (other than warehousing) of chemicals or oil or gas.

SAF projects frequently sit on the boundary between these categories, which can make it hard to assess whether the Construction Act applies. Installation of process plant on a SAF production facility may fall within the section 105(2)(c) exclusion, but design, civil works, enabling and preparatory works, and subsequent maintenance may fall within the definition of construction operations. This often results in hybrid contracts where some, but not all, parts of the project are subject to the Construction Act.

The difficulty is compounded on complex or multi‑use sites: for example, where a SAF plant is developed on the same site as an existing refinery, petrochemical facility or power station. The courts have interpreted “site” relatively broadly and may look beyond the contractual site boundary where it forms part of a larger development. On SAF projects, that assessment could change over time as new phases are brought online and SAF‑related activities become a greater part of the overall site use, making it even more challenging to predict at the outset which parts of the works will be treated as construction operations.

Payment provisions

Where a contract falls under the scope of the Construction Act, then its payment provisions must comply with that legislation. If they do not, the payment mechanism under the 1998 scheme is implied into the contract.

This can have significant commercial consequences on large or complex projects where bespoke payment regimes were intended. If applications for payment by a contractor or subcontractor are not responded to within the required timescales, the amount applied for may become due in default. For hybrid contracts, it could lead to two different payment regimes for parts of the contract that do and do not fall under the scope of the Construction Act. 

Adjudication rights

A further consequence of a contract being a construction contract is the automatic statutory right to adjudicate at any point, regardless of what the contract provides.

Even if a construction contract contains a dispute resolution clause that does not mention adjudication, a party commencing adjudication will not be in breach of contract: the statutory right to adjudicate applies irrespective of the contractual dispute resolution mechanism.

Osborne Clarke comment

On SAF and other energy projects, it will not always be clear whether a scope of works will fall under the Construction Act, and some contracts may constitute hybrid contracts. An unexpected finding that the Construction Act applies can shift commercial risk in ways neither party intended.

Where there is uncertainty as to the application of the Construction Act or where there is a hybrid contract, the parties can nevertheless agree to include contractual processes that mirror the requirements of this legislation for all of the works.

Aligning the contract in this way can help to minimise the risk of separate valuation and payment schedules which increase the risk of administrative errors that are in breach of the Construction Act and the 1998 scheme and of cashflow gaps between different types of works arising from different payment schedules. This will minimise the risk of disputes as to whether the Construction Act and 1998 scheme apply. It may also lead to non‑compliant provisions replaced by the 1998 scheme part way through the project for only some of the works.

Krystal Wachira, a trainee solicitor at Osborne Clarke, contributed to this Insight.