What makes term contracts different from others? One particular characteristic is that they usually contain a "framework" aspect. The contractor agrees to provide services or works over a period of, say, three years, but much of the work is not defined in advance. Instead, it is subject to "call-off" orders – the project manager issues orders for particular items of work which the contractor then completes (in the draft NEC term contract these call-off orders are optional). Valuation of each order is often by reference to a schedule of rates at least as a starting point; and there may also be provisions for "batching" together a number of small-value orders.
Difficult points can arise regarding the time for the performance of each order, and the sanctions for late completion. For example, how are the dates for completion of each order actually set? The project manager generally has the power to stipulate, in the order itself, a reasonable date for completion, subject to the contractor's right of objection. In default of agreement, the matter goes to dispute resolution. However, this does not actually deal with the underlying problem, namely: what are the criteria governing what is a reasonable date? One possible answer is that, in the same way that a schedule of rates helps in fixing the price, a schedule of principles can be used to fix the period for completion of each order. The schedule might contain sample items of work with guideline completion periods.
Sometimes the employer wishes to prioritise particular items of work over others, especially to deal with emergencies, as in the JCT form. The contractor will want this brought into account when the time comes to revise completion dates on other orders whose work may have been put on hold while the emergency work was dealt with. The drafting must cover this.
What is the position as to liquidated damages (LD) for delay? The draft NEC contract provisionally leaves these out, while inviting comments as to how they might be incorporated if required.
One option is to dispense with the delay damages clause altogether, and simply allow the employer to terminate the contractor's work on any particular order if there is substantial culpable delay. However, this gives the employer no redress against the contractor that persistently finishes late (though not excessively late) on a number of orders.
Another solution is to allow the employer to claim any losses that it suffers. But it may be difficult and costly for the employer to prove its losses, particularly on a large number of small-value orders.
The use of LD provisions may yet be the best solution. Employers are often concerned about these clauses being regarded as penalties, and therefore unenforcable. However, as was noted in a leading case nearly 100 years ago, the fact that it is difficult to quantify the employer's loss is no reason for a court to strike out a clause as unenforcable – indeed, it is in precisely these instances that such clauses are most appropriate. In principle, arriving at LD figures for individual orders should be no more awkward than setting the dates for completion. What is required is a clear method of calculating the LD figure for each order. This could be a function of the order, the period for completion and the type and/or location of work. So long as the method of calculation does not lead to obviously disproportionate LD figures, it is unlikely to be overturned by a court.
The draft NEC Term Service Contract tends to leave much of the detail to the parties. However, this is to be expected with a contract that can be used for a wide range of services that are not necessarily connected to construction at all. It will be interesting to see whether the final version achieves the popularity of the NEC itself.
Ian Yule is a partner in solicitor Wragge & Co.