Posts Tagged ‘NEC’

NEC3 – the finished product for effective procurement?

October 5, 2010

Is NEC3 the finished product for effective procurement?

I recall having a similar discussion about 5 years ago when NEC3 was first published. At that time, we were seeking to make sense of the changes from the second to third edition for clients.

Five years on, where are we? Our experience is that certain perennial debates are still ongoing such as:

–          Contract formation: how do clients achieve the desired result by choosing the various options;

–          Partnering: what exactly does it mean?

–          Life: how do I cope with industry expectations/evils which threaten the  precise workings of the contract?

An appraisal of NEC3, as with all industry form contracts, must come with a caveat attached. It is all-too-easy to criticise a particular contract for its failings. Contracts are not meant to be and cannot be one size fits all, which must be borne in mind here.

There are real benefits to using the NEC suite, as we all know. The three main advantages are often hailed as flexibility, simplicity and clarity.

But is that due to the terms of the contract itself, such as the early warning mechanism, or are other factors in play? How much of its apparent success is also due to market forces or strong on site project management.

It is, of course, slightly disingenuous to criticise a contract that may substantially avoid disputes by its very operation. But from a legal perspective there are aspects which, if tested, could result in the consequences of certain ambiguities in drafting being magnified.

There are, in reality, both pluses and negatives as with any contract.

Flexibility vs clarity

One of the core features of the NEC3 is, of course, its flexibility.

The forms can be used for any procurement method in an international, multi-discipline environment (be it building, civil, process engineering etc) and whether it includes contractual design or not:.

The contract is made up of various sections, as we all know:

– 9 core clause selecting the appropriate main option clause;

– 15 secondary option clauses;

– bespoke terms or amendments from the Z clauses; and

– a choice of two different schedules of cost components.

The negatives with NEC3 are exacerbated by inexperience and lack of care which may inadvertently result in no contract at all being agreed, or at least not in the way parties intended.

In terms of adjudication, there may not be a contract sufficiently evidenced in writing to enable an adjudication to take place but that may become less important with the proposed changes to the Construction Act due next year subject to the points below.

From experience, problems in the contract could arise from one or several of the following:

–          A lack of attestation clause affecting insurance cover and the duration of parties’ intended obligations;

–          The scope of services being vaguely drafted;

–          The Employer’s risks ignored in the Contract Data. This is a problem for the Contractor since it bears the risk of any not so stated.

–          In relation to the risk register, there is only an obligation to record; not to do – decision making is not mandatory (condition 16.3)

–          There may be a lack of proper programme or a failure to set out adequately sectional completion information. (X5) must be included within the contract;

–          Confusion as to the meaning and consequences of key dates as opposed to section completion dates. For clarity, a key date is an obligation to meet the condition stated in the contract by that time, whereas a section completion date acts as a trigger for the Employer to take over the works not later than two weeks after completion.

 

May be a lack of contract at all…does it really matter?

The well-known case of RJT Consulting Engineers Ltd v DM Engineering (NI) Ltd  may well be overturned by the amendments to the Construction Act but at the risk of uncertainty as to payment terms. Additionally, the right to adjudicate will still need to be in writing.

A fundamental lack of agreement over rates will remain a fertile ground for dispute, irrespective of the procedural requirements. Experience suggests that this seems to arise when the draft contract goes out to tender, the contractors then price on the information given but the contract data is sometimes never firmed up.

As a practical point, you should always get the contract data firmed up as soon as accepted, whichever side of the fence you are on. Why leave it to chance when you are undoubtedly dedicating so much administrative resource to the operation of the contract anyway?

Partnering – meaning and enforceability

Core clause 10.1, of course, states: “The Employer, the Contractor, the Project Manager and the Supervisor shall act as stated in this contract and in the spirit of mutual trust and co-operation.”

The simple problem is determining precisely what this clause means.

Core clause 10.1 comes close to a requirement to act in good faith and reflects the good faith requirements of those countries that operate under a civil code. This doesn’t work so well in England & Wales, which has a common law system. A few cases have tried to make sense of it though.

See, for example, Bedfordshire County Council v Fitzpatrick Contractors Limited [1998] where Dyson J would not imply such a term into a road maintenance contract that neither party should conduct itself in such a way that would “damage the relationship or confidence in trust” between them.

One reason for this was the care taken by the parties to detail out the terms which were to govern their contract. There was no scope to imply this further relationship.

One thing is clear from this case – being too prescriptive in terms can result in the parties losing the whole ethos of partnering. The problem is that not prescriptive enough risk the terms being too uncertain to be enforceable.

On the other hand, in Petromec Inc and Others v Petrobras and Others the Court of Appeal had to consider the whether an agreement to negotiate in good faith was enforceable. It was said the Court of Appeal because:

  • The requirement was expressly agreed by the parties as part of a contract drawn up by lawyers.
  • The Court recognised that it would be able to calculate the cost referred to and so would be able to establish whether there was a lack of good faith on the part of a party.

The questions then arise – (1) what is the standard of care in partnering and (2) how do you measure it to know if the standard has been breached?

As a reminder, it does appear that the English courts will pay attention to the intentions of the parties. Birse Construction v St David Limited is such an illustration  in which the  terms of a partnering charter was deemed not to be, and never intended to be, a binding contract even though it had been signed by the parties. As the judge said, the terms, whilst:

“clearly not legally binding, are important for they were clearly intended to provide the standard by which the parties were to conduct themselves and against which their conduct and attitude were to be measured.

This is the approach that any judge or adjudicator should follow if asked to consider the effect of core clause 10.1 in NEC3.

How do you establish the standard of care in partnering? The answer is to  list out any activities which demonstrate that the parties are acting in good faith.

How do you measure the standard? By the use of KPIs as an option to ensure that objectives surrounding cost, completion and accuracy are achievable.

Please mind the gap…z clauses

Notwithstanding the above, some would suggest that the lack of detail contained in NEC3 can lead to ambiguity and that clarity in respect of certain matters should be set out at the outset, rather than as particular events occur. Accordingly, Z clauses may typically address the following:

  • The provision of collateral warranties. Notwithstanding the Contracts (Rights of Third Parties) Act 1999, the construction industry still relies heavily on collateral warranties. It is often the case that funders, tenants and the like will insist on an employer procuring collateral warranties from its contractor. An employer will therefore be forced to include such provision within the contract;

 

  • Copyright. Where a contractor has design responsibility, it is important to include a provision addressing matters relating to copyright. Without such clarity the employer’s rights, if any, to use the design would be uncertain.

 

  • Prohibited materials and Codes of Practice. Again, where a contractor has design responsibility a provision requiring the contractor to refrain from using prohibited materials in design and construction may be necessary so as to prevent the use of unsuitable materials;

 

  • Assignment. A provision prohibiting the contractor from assigning the contract may be necessary so that the employer has certainty in respect of who is actually carrying out the works.

 

  • Confidentiality clauses – of particular importance in the public sector.

 

  • Project specific definitions – one size does not fit all, as mentioned earlier.  

 

  • Notice to Contractor of any third party interests, e.g. a landlord or funder, so that it does not act inconsistently and inadvertently put Employer in breach of its obligations. If the Contractor cannot comply, then it is best to say upfront at which point relief from any indemnity that may be put in.

 

  • Details of the insurance provisions actually in place for the project.

 What should be remembered is that Z clauses are not intended to substantially rewrite the standard clauses of contract. Indeed, improper use of Z clauses can be problematic.

No doubt it is quite easy for parties to simply “cut and paste” provisions contained in some “special conditions” or a “schedule of amendments” into Z clauses. The problem is that in doing this the parties can quite easily fall back into old habits, thereby defeating the benefits of using the NEC. Put simply, wholesale amendments to the standard form through the use of Z clauses should normally be resisted.

Saying that…certain conditions are (by the parties’ desire for clarity as to their consequences) still amended and redress the contractual balance. For example, dealing with the consequences of ambiguities/inconsistencies being discovered in condition 17.1.

Unamended, the Contractor is duty bound to notify the Employer of any ambiguity or inconsistency between “documents which are part of this contract.” Normally, an instruction follows. If it amends the Works Information, then this normally amounts to a Compensation Event.

A proportionate amendment would be to avoid the Contractor benefiting from its own breach where it fails to submit design information to the Employer and this leads to direct loss or delay.

What’s the feeling – does it tick all the boxes?

Success in using NEC3 requires a lot of pragmatism. Get the contract formation right and get the legal obligations drafted carefully so that they are effective. Partnering works when it can be measured.

There remain other barriers to effective procurement in addition to the legal uncertainties mentioned above including:

• The change in mindset required in complying with NEC3 weighed against the appearance of being “contractual”.

Experience of managing a project on NEC3 terms.

Resource having to deal with an administratively burdensome contract.

Knowledge The increased use of NEC3 by both the public and private sector.

Get this right and the benefits can be considerable leading to cost savings and success in terms of delivery.

Advertisements