The continued rise of the NEC3
In recent years, particularly in the wake of the Latham and Egan Reports, the construction industry has been getting to grips with collaborative procurement. Chris Farrell takes a look at the apparent rise in use of the NEC3 form and also discusses the references made, not always in flattering terms, to that contract by the courts during 2010.
There have been several high-profile clients that have embraced collaborative procurement. BAA did so when procuring both Heathrow Terminal 5 and Terminal 2; the Office of Government Commerce (OGC) publicly endorses collaborative procurement, and notably the Olympic Delivery Authority (ODA) has done so in procuring the 2012 Olympic Games.
In fact the OGC and the ODA went one step further and endorsed one particular suite of contracts to procure the majority of their works, the New Engineering Contract, third edition (NEC3). The NEC3 suite of contracts has also been endorsed by numerous organisations and individuals, not least Michael Latham himself, the author of the influential report. The NEC3 is now seen as the contract of choice in many projects and, as the title suggests, particularly those with an emphasis on civil engineering. The reason why the contracts are well liked by employers and contractors alike is due to the way in which the NEC3 approaches risk management:
“The key to the success of NEC contracts is they enable the contracting parties to adopt a far more positive culture and mindset than is normally the case … NEC contracts may initially appear to be similar in concept and language to other standard forms, but in reality they are radically different. In particular they involve moving away from reactive, hindsight based management and decision-making to an approach that is informed, proactive and foresight based.”
This is one particular aspect the NEC3 prides itself on, the language of the contract. It is written in non-legalistic language, in short sentences and, most noticeably, in the present tense. These are all meant to make it easier to use for the people who are actually operating the contract on site, as opposed to many other industry standard forms which show their age after over half a century of evolution. However, this form of drafting has not met with approval from all quarters. In the 2010 case of Anglian Water Services Ltd v Laing O’Rourke Utilities Ltd,1 the newest full-time TCC judge, Mr Justice Edwards-Stuart had this to say about the NEC3:
“I have to confess that the task of construing the provisions in this form of contract is not made any easier by the widespread use of the present tense in its operative provisions. No doubt this approach to drafting has its adherents within the industry but, speaking for myself and from the point of view of a lawyer, it seems to me to represent a triumph of form over substance.”
This was perhaps no more than an aside, and certainly did not directly impact upon the decision in that case. So, should this matter though? As the Judge himself concedes, construction industry professionals are the people whose opinions should matter the most. It is a point sometimes lost on lawyers that a dispute is not an inevitable part of a construction project and should not be thought of as such. This is brought acutely into focus on projects such as Wembley Stadium and the Olympics, where the time for completion and cost overruns can become issues of national importance.
So, can all these construction professionals be wrong? Indeed, the NEC3 is proving so popular that in August this year, the Institute of Civil Engineers removed its backing from the ICE Conditions of Contract and publicly endorsed the NEC3 suite. It is not that there are no disputes on projects using the NEC3 form, but that the contract enables quicker and different methods to resolve those disputes.
For example, the NEC3 contains a risk register. This register catalogues risks that may occur during the works, and identifies how the parties are going to deal with each item. Not only does the risk register include items agreed as risk items at the outset of the contract, but it also allows for the project manager to add items throughout the works, in response to early warning notices issued by the contractor. If items cannot be solved by reference to the risk register, then the contract also provides for a risk reduction meeting so that the parties can sit down informally and discuss the problems that have arisen. This can help to prevent parties’ positions becoming entrenched, as they can with continued and often repetitive correspondence.
RBG Ltd v SGL Carbon Fibers Ltd 2
One measure of its success is how infrequently the NEC3 has come before the courts. In fact one of the only cases where its terms have actually been analysed in court was in the recent Scottish adjudication enforcement case of RBG Ltd v SGL Carbon Fibers Ltd. RBG was engaged by SGL to perform certain works at SGL’s premises. The contract incorporated the NEC3 target cost option. Disputes arose over RBG’s entitlement to payment for certain invoices and the effect of the NEC3 Option C payment mechanism under clauses 50 and 51. The judge had to consider whether the adjudicator should have taken an earlier overpayment into account, when considering the amount due to RBG, as alleged by the responding party in the ensuing adjudication.
NEC3 provides that the amount due at the assessment date is the Price for Work Done to Date (“PWDD”), plus other amounts to be paid to the Contractor less amounts to be paid by or retained from the Contractor. Cl 11.2(29) defines PWDD as “the total Defined Cost which the Project Manager forecasts will have been paid by the Contractor before the next assessment date plus the Fee”.
The judge agreed that the contractual mechanism under the NEC3 for the assessment of payments is based on an accumulating “PWDD”. Assessment of PWDD required consideration of the Defined Cost (clause 11.2(23)) less Disallowed Cost (clause 11.2(25).The quantity surveyor makes an assessment of the PWDD as at the assessment date, and can make further contractual additions or deductions to this figure. This mechanism requires the quantity surveyor to calculate the PWDD as an accumulating balance, and allows him to correct any earlier mistakes. The NEC3 adjudication provisions effectively require the adjudicator to perform the same task. Therefore, the judge decided that in order to calculate the PWDD, the adjudicator had to have regard to the earlier overpayments.
Accordingly, the adjudicator’s decision was not enforced. In adjudication terms, whilst it should always have been open to SGL to raise the overpayment as a defence, following Cantillon v Urvasco, the case confirms that if the level of PWDD is challenged by either party, then the adjudicator is required to make his own assessment. Further, each party should be prepared to substantiate their position with all the relevant paperwork, and cannot simply rely on the quantity surveyor’s assessment.
Equally, this case highlights as well the importance for contracting parties, contract administrators and adjudicators of the need to be aware of the differences in operating, or resolving disputes over, whatever form of contract may have been used.
Conclusion
It seems the NEC3 is becoming increasingly popular within the industry. We are seeing an increase in clients seeking advice on entering into an NEC3 contract or avoiding formal legal proceedings. However, giving clients’ firm advice on the NEC3 is made more difficult due to the lack of judicial guidance on its terms. One of the main advantages of the JCT suite of contracts is that the language has been tested time and again by the courts and, whilst it might be more legalistic, lawyers can be more confident of advising on its interpretation. However, with the increased use of NEC3, on the 2012 Olympics in particular, inevitably more judicial guidance will follow, and the likely effect of that is that its use should only increase.