Operation of the standard forms: NEC

The NEC (New Engineering Contracts) suite of contracts (together with the JCT suite of contracts) has historically been seen as a standard form for the UK domestic market. This is primarily driven by the NEC form being the contract of choice for public sector contracts in the UK.

However, in recent years there has been an increase in the use and uptake of the NEC contract across the globe. The NEC suite of contracts focus on collaborative project management, tools to facilitate this, and is well suited to international projects as they encourage mutual understanding and collective thinking on what can otherwise be a challenging cooperative process across borders.

Further developments to increase the use of the NEC internationally have been introduced in the recently published NEC4 suite, including the introduction of dispute avoidance boards, which aim to proactively address and dispose of issues before they manifest into large-scale disputes.

Aside from its unique emphasis on collaboration, the NEC suite differs in several ways from other common standard form construction and engineering contracts, including:

• reliance on the parties to update the programme regularly;
• practical completion being a state defined within the works information, rather than a subjective judgement;
• use of the present tense in the drafting of obligations; and
• use of terminology that does not always match that of other contracts.

1. Potentially relevant compensation events

(a) Project Manager Instructions: For changes to Works Information (Clause 60.1(1)) or instructions to stop or not start work or change a Key Date (clause 60.1(4)).

(b) Weather Measurement: Clause 60.1(13) within a month before the Completion Data at the place in the Contract Data. This clause is triggered if the contemporary weather measurements are shown to be greater / more severe than the weather data set out in the Contract Data. The difference is taken into account in assessing a compensation event

(c) Prevention: Clause 60.1(19) (see further below)

(d) Change in law of the country where the Site is located after the Contract Date: Option X2 if selected. X2 is only triggered by a change in law and not by guidance or other advice issued. It is also only applicable to changes of law of the country of the Site and so would not apply to changes in laws of other countries which may affect the movement or availability of labour or materials.

2. Entitlement

(a) Clause 63 Assessment: Potential entitlement to both time and money.

(b) Clause 61.6 Assumptions: If effects are uncertain, assumptions in PM instruction to issue quotations. If assumptions incorrect, PM issues correction. This would also be a compensation event under Clause 60.1(17). All parties should be carefully considering assumptions and whether any corrections are required as matters progress.

(c) Assessments are based on the assumption that the Contractor reacts competently and promptly (clause 63.7/63.9). Ensure the Contractor is taking all steps to mitigate the consequences of any such event as the assessment of the compensation event will not take account of any costs or time incurred whereby the Contractor has not acted competently or promptly.

3. Potential Termination Rights

(a) Clause 91.6/R20: PM Instructions to stop or not start or not start substantial work and instruction to restart not given within 13 weeks

(b) Clause 91.7 R21: event of prevention forecast to delay completion by more than 13 weeks.

During the performance of the Works, Contractor is entitled to be paid the Defined Cost of carrying out the works – which comprises (cl 11.2(23)):

(a) The payments due from the Contractor to Subcontractors for sub-contracted parts of the works plus the cost components listed in the Schedule of Cost Components for work that is not sub-contracted;

(b) Less Disallowed Cost (see cl 11.2(25)).  Disallowed Cost includes cost not justified by Contractor accounts & records, costs that shouldn’t have been paid to Subcontractors or suppliers in accordance with their Contracts, costs incurred due to Contractor not following procedure in Works Information or giving an early warning, cost of correcting Defects (after Completion or caused by Contractor not complying with constrains in Works Information), costs incurred in relation to plants, materials and resources not used in the works (allowing for reasonable wastage).

Defined Cost is the basis for assessing the financial impact of Compensation Events and the Contractor carries the cost risk, other than risks allocated to Employer/Client under the contract and the financial and time effects of a Compensation Event.

NEC3

NEC4

To be communicated in a form which can be read, copied and recorded (clause 13.1). Make sure any notice is issued separately to other communications and that each notice is in a separate communication (clause 13.7). Obligation on Contractor and PM “as soon as either becomes aware of any matter“.

NEC4: Obligation to hold early warning meetings at intervals in Contract Data so these should be ongoing throughout pandemic to assist in mitigating effects and identifying solutions (Clause 15.2-15.3).

1.  Is the event an event of prevention?
   No concept of force majeure in NEC. Clause 19 deals with prevention.Clause 19: if an event occurs which:- stops the Contractor completing the works or stops the Contractor completing the works by the date in the Accepted Programme and which- neither Party could prevent and- an experienced contractor would have judged at the Contract Date to have such a small chance of occurring that it would have been unreasonable for him to have allowed for it,the PM issues an instruction as to how the Contractor is to deal with the event.Does event actually stop completion of the whole of the works or just make more expensive or difficult? If the event just makes the work more expensive or difficult or just affects a section of the works but not the whole of the works then arguably the Contractor has not been stopped from completing the whole of the works by that event. This may be a difficult test to fulfil.How the Contractor is to respond will be determined by the PM. There is no automatic right to down tools or change manner of working prior to an instruction being issued by the PM.
2. What is the effect?
   If the criteria in clause 19 are met, the event is a compensation event under Clause 60.1(19) but only where the event is not one of the other compensation events in the contract. Other compensation events may include clause 60.1(14) Employer’s/Client’s risk; or clause 60.1(1) or (4) PM Instructions. Clause 60.1(19) may not apply or may only apply in relation to some of the consequences of the event if the PM has issued an instruction in relation to the event – for example, changing Works Information or stop work or change a Key Date. The correct compensation event may be clause 60.1(1) or (4) in relation to any such instruction. Compensation events to be assessed in accordance with clause 63, which may include a change to the Prices, Completion Date or  Key Date. These are exclusive rights in respect of a compensation event (clause 63.4 NEC3 / 63.6 NEC4).

Assessments are based on the assumption that the Contractor reacts competently and promptly (clause 63.7/63.9). Ensure the Contractor is taking all steps to mitigate the consequences of any such event, as the assessment of the compensation event will not take account of any costs or time incurred whereby the Contractor has not acted competently or promptly.

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