Introducing NEC4

Jeremy Glover, Partner, Fenwick Elliott

The FIDIC Contract is not the only contract form begin amended this year. On 22 June 2017, the NEC4 Form was revealed1. We thought it might be helpful to explain some of the changes, and at the same time highlight some of the differences with the FIDIC Form.

The New Engineering Contract (“NEC”) was first published in March 1993.  Like, FIDIC, the NEC form was designed for international use with a choice of governing law and language. Unlike FIDIC, to date, the NEC Form is not used widely across the globe, although it is certainly its use is on the increase where it is used.

In the UK, NEC3 was the contract of choice of the Olympic Delivery Authority who were responsible for the planning, designing and building of the venues, facilities and accommodation and developing of the infrastructure to support these for the 2012 Olympic Games. NEC3 is also widely used in the decommissioning of nuclear power stations and is currently being used on Europe’s largest construction project, the Crossrail project in London2.

More globally, in Hong Kong following a number of pilot projects including the HK$2billion community hospital at Tin Shui Wai, from April 2015 all Hong Kong Government works departments are required to tender new projects using the full suite of NEC3 contracts. The NEC3 has also been widely used on major projects in South Africa; and the South African Construction Industry Development Board currently recommends NEC3 contracts for public-sector use in South Africa. In South Africa the NEC3 Form, along with FIDIC is one of four contracts authorised for use under the Construction Industry Development Board (CIDB) Act.

The NEC clearly wants to expand their reach. Peter Higgins, the chair of the NEC4 Contract Board in the prefaced to the new contract said that one of the three key objectives of NEC4 was to:

“'inspire increased use of NEC in new markets and sectors”.

In summary, the NEC3’s three core principles are:

(i) Flexibility:

The basic idea is that you construct your contract from the core clauses3, main options and secondary options described below which will avoid the need for bespoke amendments. However, one typically finds that NEC contracts do come with a number of  bespoke amendments or Z-clauses;

(ii) Simplicity and clarity:

The contract is written in the present tense, and avoids the use of mandatory words in plain English. This is in marked difference to other contract forms. The use of short direct clauses and the simplicity of language is intended to reduce the occurrence of disputes; and

(iii) Stimulus for good management:

The NEC3 focuses on real-time management. This can lead to high demands on management and administration time. As with any contract, both parties need to understand the process and ensure that it is properly resourced.

NEC4

The NEC announced at the beginning of March 2017, that they were releasing the new NEC4 on 22 June 2017. The three core drafting principles were:

• Stimulus to good management
• Support the changing requirements of users
• Improve clarity and simplicity

At the conference where the new form was released, the NEC made clear that their approach was “improvement through collaboration” or “evolution not revolution”. It is very much an update, the key features are the same and the contract unsurprisingly still adopts the same plain English style. As well as updating the existing NEC3, a new Design Build Operate contract has been introduced and the NEC are planning to introduce an NEC4 Alliance Contract.

The NEC form has adopted gender neutral drafting.

There are also some changes in terms, Employer becomes Client and Works Information is now Scope, format of programme to be stated in Scope. In keeping with the international emphasis on the need to eliminate bribery, the NEC has introduced “Corrupt Act” as a defined term under clause 18.

As with FIDIC, the NEC4 makes use of deeming provisions. A contractor’s programme will be for deemed to be accepted if the project manager does not respond within the contract timescales. Again as with FIDIC, the NEC4 introduces a requirement for the contractor to prepare a quality management plan.

Just as with FIDIC there is an increased emphasis on collaboration. An option has been included to appoint a contractor at an early stage, to participate in the development of designs and proposals. The basic idea is that this enables the contractor to consider the design at an early stage when there is still scope to introduce improvements and/or costs savings.

Dispute Resolution and Dispute Adjudication Boards

Again, as with FIDIC, there is an increased emphasis on dispute avoidance. The “Dispute Resolution” part of NEC3 has been renamed “Resolving and Avoiding Disputes”  in NEC4.

Under NEC3, there are two Dispute Resolution, options W1 and W2, one for use where the UK adjudication provisions, the Housing Grants, Construction and Regeneration Act 1996, apply, one for where they do not.  Both provide for adjudication as a mandatory pre-condition to arbitration. 

The NEC4 has introduced a new option of referral to senior representatives of the parties to the project.  The idea is to provide for a four-week period for negotiation to see whether a more formal dispute can be avoided.  This does not (and in the UK could not) affect the statutory right to refer a mater to adjudication at any time.

In addition, the NEC4 introduces a new option, W3 which provides for the use of Dispute Adjudication Boards (“DAB”). Only for use where the UK mandatory adjudication provisions do not apply, the proposed DAB is similar in form to the FIDIC DAB. Under Option W3, the NEC4:

• There is a standing DAB, nominated by the parties at the time the contract is formed;
• The DAB has one or two members;
• The DAB is encouraged to make site visits and so become familiar with the project at a time when there are no disputes;
• The DAB is able to provide assistance and non-binding recommendations when disputes do arise.

Early Warning

FIDIC have included a new early warning clause (8.4) in the new 2017 Yellow Book. This follows the clause to be found in NEC3 and the FIDIC Gold Book. Under the NEC4 scheme, for clarity the risk register has been renamed as the early warning register and under clause 164, the Project Manager prepares a first early warning register within one week of the starting date. Regular early warning meetings are then to be held starting within two weeks of the starting date.

BIM

Previously the NEC had prepared a guide entitled “how to use BIM with NEC3 Contracts”. This is no longer a part of the NEC4 contract suite. The “how to” guide, had also explained how NEC3 could be used with the CIC BIM Protocol. All references to the CIC Protocol are now gone.  

The new NEC4 contract instead includes a new secondary option, X10, specifically to support the use of BIM. This, the NEC have said, will provide “the additional contract clauses required to support the production of information for BIM.” As well as dealing with issues such as the Model, ownership and liability, under the new BIM option, the Contractor will be required to providean Information Execution Plan (the more standard phrase in general use is the BIM Execution Plan) either for incorporation in the contract from the outset, or within a period defined by the Client.

Design Responsibility

Under the FIDIC Form, the Contractor will usually find itself subject to a fitness for purpose obligation in respect of anything they design. The NEC scheme is not always totally clear. Design is not mentioned in the core clauses, but the secondary options do deal with design liability.

Under, NEC3, X15.1 provides that “The Contractor is not liable for Defects in the works due to his design so far as he proves that he used reasonable skill and care to ensure that his design complied with the Works Information.”

The requirement that the Contractor prove that it used reasonable skill and care has been amended slightly. Under NEC4: “The Contractor is not liable for a Defect which arose from its design unless it failed to carry out that design using the skill and care normally used by professionals designing works similar to the works.”

However, regardless of whether or not the NEC contract includes X15.1, a Contractor should check to see whether the obligations in the Scope (formerly Works Information) actually impose a fitness for purpose obligation on any elements of design carried out by the contractor.

Insurance

Another of the changes introduced by the new draft FIDIC form was in relation to insurance. Under new clause 17.2, a Contractor’s risks are stated to be all the risks other than those listed as Employer’s risks. This follows the scheme set out in the NEC3 form where all those risks for which the employer is not expressly responsible under clause 80.1 are risks for which the contractor is liable.

However under NEC4, this has all changed and contrary to the new FIDIC and NEC3, the Contractor’s liabilities are now set out in clause 81 , rather than by exception.  

Good Faith

There is no good faith obligation in the FIDIC Form, although such an obligation is implied by most civil codes. However clause 10.1 of the NEC Form does include such an obligation. In the NEC 4 form this has been amended slightly and the good faith obligation now follows more closely typical requirements set out in civil codes. Under NEC4, clause 10.1 has been split into two separate parts, an obligation:

10.1        The Parties, the Project Manager and the Supervisor shall act as stated in this contract.

10.2        The Parties, the Project Manager and the Supervisor act in a spirit of mutual trust and co-operation.

It would be interesting to see how this clause is interpreted. In England and Wales the courts5 have made it clear that by noting that there is no general doctrine of ‘‘good faith’’ in English contract law. If the parties wish to impose such a duty they must do so expressly. The content of a duty of good faith is heavily conditioned by its context. The obligation to cooperate in good faith was not a general one that qualified or reinforced all of the obligations on the parties in all situations where they interacted.

Conclusion

Whilst there are not as many changes to the NEC4 form as there are to the new FIDIC Form, it is interesting to review the changes and compare them with the FIDIC Form.  For example, the addition of the Dispute Board option by the NEC is recognition of the importance of real time dispute avoidance as well as being a signal that the NEC is looking to widen its areas of operation.

[1] The NEC adopted a different approach to FIDIC, simply revealing the updated contract rather than releasing a draft or review version.

[2] Europe’s largest construction project: building 42KM of new tunnels beneath London. Work started in May 2009 and there are currently over 10,000 people working on 40 construction sites.

[3]     The guidance notes say “Additional conditions should be used only when necessary to accommodate special needs such as those peculiar to the country in which the work is to be done”.

[4] Formerly 15

[5] See for example, Compass Group UK and Ireland Ltd (trading as Medirest) v Mid Essex Hospital Services NHS Trust [2013] EWCA Civ 200

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• 1. The NEC adopted a different approach to FIDIC, simply revealing the updated contract rather than releasing a draft or review version.
• 2. Europe’s largest construction project: building 42KM of new tunnels beneath London. Work started in May 2009 and there are currently over 10,000 people working on 40 construction sites.
• 3. The guidance notes say “Additional conditions should be used only when necessary to accommodate special needs such as those peculiar to the country in which the work is to be done”.
• 4. Formerly 15
• 5. See for example, Compass Group UK and Ireland Ltd (trading as Medirest) v Mid Essex Hospital Services NHS Trust [2013] EWCA Civ 200