Depending on who you ask, the new NEC contract displays favouritism to contractors or employers. In fact, it is the lawyers who amend it who are causing the problems
“My slip, your fall”, “one stop short of barking” and “mad” – these phrases have all appeared in Building articles about the NEC3. Each article, if read in isolation, is not a balanced view of the contract. They take isolated provisions and extrapolate. Worse still, they are written from an employer or contractor bias.
Take, for example, compensation events, which have come in for criticism. These may entitle the contractor to have the completion date adjusted and recover any change in defined costs resulting from them. Roger Button (2 September, page 56) bemoans the strict requirements that prevent a contractor from claiming compensation events if it fails to give notice in the eight-week period.
On the other hand, Ian Yule (18 November, page 70) is critical of the employer being saddled with a quotation for a compensation event if the project manager does not do what the contract requires. Both complain of bias but the contract is not in favour of the employer or the contractor, it is just strict.
The notice requirements are designed to avoid disputes at the end of the project. The contract has at its heart a programme that requires the parties to notify each other of compensation events and adjust the timings. If the project manager or the contractor fails to operate the provisions, there are sanctions.
The message to employers is: if you don’t want a contract that is procedurally strict and requires the parties to manage rather than apportion risk, don’t choose the NEC. What you cannot do as an employer is choose the NEC and complain about its rigour for the project manager and yet expect to impose its rigour on the contractor.
The other criticism is the apparent breadth of compensation events. Yule refers to clause 60.1(19), which provides for an event that:
- Stops the contractor completing the works or
- Stops the contractor completing the works by the date shown on the accepted programme.
It must be an event that:
- Neither party could prevent
- 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
- Is not one of the other compensation events stated in the contract.
Yule suggests this clause could apply to subcontractor insolvency or an unexpected shortage of materials or labour. He cites the
Scott vs Lithgow case, where defective cables supplied by a subcontractor as part of the construction of a nuclear submarine had to be replaced, causing delay. Scott claimed against the employer arguing the supply of the defective cables was “beyond the contractor’s control”.
The House of Lords held in favour of Scott.
Yule draws a similarity between the wording of the contract in this case and NEC3. In fact, NEC clause 26.1 says: “If the contractor subcontracts work, it is responsible for providing the works as if it had not subcontracted. The contract applies as if a subcontractor’s employees and equipment were the contractors.” Also, under NEC, the employer is responsible for the performance of “others” – those that are not part of the supply chain or parties to the contract.
Given such provisions it is not at all certain that the conclusion concerning subcontractors in Scott vs Lithgow would apply when interpreting the NEC on a standard building project.
As for a shortage of materials or labour, these are not considered compensation events unless they stop the contractor’s work. Neither delay nor the work becoming economically or commercially impracticable are sufficient to trigger a compensation event.
Take for example the case of Thames Valley Power Ltd vs Total Gas and Power, in which Total Gas and Power argued that the cost of gas had risen so greatly as to make the contract commercially not viable. That was rejected. The court held it was not unable to perform the contract and so could not rely on the clause.
The NEC is all about managing risk on site – not transferring it on paper and leaving the contract in the drawer for the House of Lords to consider. Amendments that fail to understand the structure of the contract as a whole will not necessarily transfer the risk and may simply destroy the balance of the contract.
Tim Willis is a partner in Wilkes Partnership and also works for NEC and is a member of the NEC users group