Disputes on NEC projects are on the rise, so if you don’t want to find yourself in a bind, here are some points to be aware of when using this contract
We are seeing more disputes on the NEC form than was previously the case, but this is no doubt linked to the fact that it is being used for public and quasi-public procurement, which are still relatively buoyant areas. With that caveat, it is notable how few reported disputes arise under the NEC. This may be because it came along at a time when adjudication was establishing itself: because the NEC requires adjudication as the first tier of dispute resolution, and adjudication does not give rise to reported authority (except in enforcements), it is not easy to be sure what areas of NEC are giving rise to disputes. The following are some areas to watch.
There are a number of issues in relation to compensation events under NEC. This is an area of risk for contractor and employer. For the contractor, a particular danger is that when asked to price and provide a quotation, it has to take account of all the circumstances that relate to the varied work, including time implications. This is an onerous exercise, particularly in the middle of a project when all the implications may not be readily apparent. If the contractor
does not capture all the costs and the quotation is accepted by the project manager, the contractor is bound to its quotation, and may later incur costs it cannot recover. If it allows for all exposures and arrives at a high price for a compensation event, then it is unlikely that the quotation will be accepted.
However, the risk is not all one-sided.
There are issues for the employer as well.
If, for instance, the project manager accepts a quotation, that forms a binding contract for the particular event, along with its pricing and consequences. Although there is a general power given to a project manager under the core clauses to review valuations, this does not allow them to review a valuation after they have accepted a contractor’s quotation. The project manager has a number of options in relation to quotations, including arriving at their own valuation or requiring the contractor to produce a different one.
Another problem with the NEC is whether its mechanics are robust enough to cope with the demands of a large, complex project
If, however, they proceed to accept a valuation, then they have to accept the consequences.
Another problem with the NEC is whether the mechanics of the form are robust enough to cope with the demands of a large-scale, complex project. A particular problem that has been experienced more than once is an overload of disputed compensation events at the same time as the re-programming of the works is going on. Where one party does not accept that the works are in delay because of their default, and there are disputes as to whether items are compensation events, it can become impossible to agree a revised programme. If an amicable resolution cannot be arrived at, the issue has to go to adjudication, which means in practice a revised programme that is not agreed can be unresolved for more than a month – during which yet more delay events and compensation events may be taking place. The difficulty then created is that the contractor is effectively trying to programme for those further compensation or delay events against a programme that is not fixed or agreed as a baseline. Given enough compensation events and disputes regarding delays, this can cause the project to become unworkable.
Further, both parties may be awaiting the decision of an adjudicator, but may have other issues they then need to prepare and take to dispute resolution, which means that a continuous battle is fought as to the status of the project, the responsibility for delays and the status of compensation events. This can render the carrying out of works a secondary consideration – which is far from the intended spirit of the NEC form.
One of the key issues in relation to the NEC is to take care with the adoption of option clauses and the completion of the contract data. Although the core clauses of NEC are relatively simple and brief, this tends to mean that the devil is in the annexed documents, the completion of the contract data and the option clauses. Therefore, in an NEC contract a lot of the mechanics can be found in subsidiary documents, which greatly affects how the core clauses will be applied in any particular situation. It is perhaps inevitable that if core clauses have a refreshing brevity, then there is always going to need to be much more detail below the surface.
Care is also needed because the NEC3 contains an entire agreement clause. This means it is vital that the correct documents are incorporated into the contract. There’s no point in relying on a pre-contract discussion for a compensation event if the minutes are not incorporated into the contract.
James Bessey is a partner in Cobbetts