HKIE - Seminar on NEC Contract (011209).

7/28/2019 HKIE - Seminar on NEC Contract (011209).

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NEC ContractNEC Contract

Gilbert Kwok Gilbert Kwok

LLB (English Law), LLB (PRC Law), FHKIS, FRICSLLB (English Law), LLB (PRC Law), FHKIS, FRICS

Partner, Construction & Engineering Group , Li & PartnersPartner, Construction & Engineering Group , Li & Partners

andand

Justin Yuen / Stephanie Lau / Christy Yiu / Edmund Chau Justin Yuen / Stephanie Lau / Christy Yiu / Edmund Chau

Members of the Construction & Engineering Group of Li & PartnersMembers of the Construction & Engineering Group of Li & Partners

Li & Partners

Li & Partners 1



Outline of SeminarOutline of Seminar

IntroductionIntroduction

Part 1Part 1 -- Standard Form ConstructionStandard Form Construction

ContractsContracts

by Gilbert Kwok and Stephanie Lauby Gilbert Kwok and Stephanie Lau

Part 2Part 2 -- New EngineeringNew Engineering

Contract (NEC)Contract (NEC)

by Justin Yuen, Christy Yiu and Edmund Chauby Justin Yuen, Christy Yiu and Edmund Chau

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Part 1:Part 1:

Standard Form Construction ContractsStandard Form Construction Contracts

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IntroductionIntroduction

I. Procurement MethodsI. Procurement Methods (by Gilbert Kwok)(by Gilbert Kwok)

II. Some Types of ContractsII. Some Types of Contracts (by Gilbert Kwok)(by Gilbert Kwok)

III. Forms of Contracts Commonly UsedIII. Forms of Contracts Commonly Used (by (by

Stephanie Lau)Stephanie Lau)

IV. Why Getting the Right Form is Important?IV. Why Getting the Right Form is Important? (by (by Stephanie Lau)Stephanie Lau)

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I. Procurement MethodsI. Procurement Methods

Traditional Traditional

Design and BuildDesign and Build

Management Contracting Management Contracting

Construction ManagementConstruction Management

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TraditionalTraditional

Employer

Main Contractor

Sub-contractors

Consultants

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TraditionalTraditional

FeaturesFeatures

2 sets of contractual relationships2 sets of contractual relationships

ConsultantConsultant’’s roles role Main ContractorMain Contractor’’s responsibility s responsibility

Advantages Advantages

CriticismCriticism

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Employer

Design and

Build Contractor

Sub-contractors

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Simple contractual relationshipSimple contractual relationship

Single point responsibility Single point responsibility

Overlap of design and constructionOverlap of design and construction

CriticismCriticism Quality of worksQuality of works

Tendering Tendering

Tamar Development Project Tamar Development Project

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Management ContractingManagement Contracting

Employer

Management

Contractor

Work Package

Sub-contractors

Consultants

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Management ContractManagement Contract

Contractual relationshipContractual relationship

FeaturesFeatures

The project team The project team

Remuneration of the Management ContractorRemuneration of the Management Contractor

Management ContractorManagement Contractor’’s roles and dutiess roles and duties Advantages Advantages

CriticismCriticism

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EmployerConstruction

Manager

Work Package

Contractors

Consultants

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Contractual relationshipContractual relationship

Distinguishing CM from MCDistinguishing CM from MC

FeaturesFeatures


CriticismCriticism

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II. Some Types of ContractsII. Some Types of Contracts

Lump Sum Fixed Price ContractLump Sum Fixed Price Contract Based on BQBased on BQ

Based on Drawings and SpecificationsBased on Drawings and Specifications Measurement ContractMeasurement Contract

Schedule of RatesSchedule of Rates

Bills of Approximate QuantitiesBills of Approximate Quantities

Reimbursement ContractReimbursement Contract

Option: Guaranteed Maximum Price (GMP)Option: Guaranteed Maximum Price (GMP) Area of dispute Area of dispute

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CIII F f C



III. Forms of ContractsIII. Forms of Contracts

Commonly UsedCommonly Used

Hong Kong Private SectorHong Kong Private Sector

Hong Kong Public SectorHong Kong Public Sector

InternationalInternational

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Hong Kong Private SectorHong Kong Private Sector

Standard Form of Building Contracts ( Standard Form of Building Contracts ( 1986 Edition1986 Edition && 20052005Edition)Edition)

Published by HKIA / HKIS / HKICMPublished by HKIA / HKIS / HKICM

2005 Edition2005 Edition More detailed description of rights/obligationsMore detailed description of rights/obligations Lengthy references: procedures/management requirementsLengthy references: procedures/management requirements

More notice requirementsMore notice requirements

OthersOthers Standard Form of Contract for Minor WorksStandard Form of Contract for Minor Works

Standard Form of Domestic SubStandard Form of Domestic Sub--contractcontract ( published by the( published by the Hong Kong Hong Kong Construction AssociationConstruction Association ) )

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Hong Kong Public SectorHong Kong Public Sector

-- HK HK GovtGovt / Public works/ Public works

a)a) General Conditions of Contract for:General Conditions of Contract for:--

Building Works, 1999 EditionBuilding Works, 1999 Edition Civil Engineering Works, 1993 & 1999 EditionCivil Engineering Works, 1993 & 1999 Edition

Design and Build Contract, 1999 EditionDesign and Build Contract, 1999 Edition

E&M Engineering Works, 1999 EditionE&M Engineering Works, 1999 Edition

Term Contracts for Building Works, 2004 Edition Term Contracts for Building Works, 2004 Edition

Term Contracts for Civil Engineering Works, 2002 Edition Term Contracts for Civil Engineering Works, 2002 Edition

Term Contracts for E&M Works, 1994 Edition Term Contracts for E&M Works, 1994 Edition

b)b) SubSub--Contract for Building Works, 2000 EditionContract for Building Works, 2000 Edition

-- ““Government FormsGovernment Forms””

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InternationalInternational

a)a) JCT JCT

b)b) FIDICFIDIC

c)c) ICEICEd)d) NECNEC

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a) JCTa) JCT

BackgroundBackground

Joint Contracts Tribunal Joint Contracts Tribunal

Representative bodies of construction industry Representative bodies of construction industry

History History – – 1919thth Century Century

LatestLatest -- 2005 Edition2005 Edition Criticism: lengthy / complexCriticism: lengthy / complex

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b) FIDICb) FIDIC

The International Federation of Consulting The International Federation of Consulting

EngineersEngineers

International contextInternational context

Widely used Widely used – – building / engineering work building / engineering work

Main types of Conditions of Contracts (99 Ed)Main types of Conditions of Contracts (99 Ed) Red Book Red Book – – Construction (for Building andConstruction (for Building and

Engineering Works)Engineering Works)

Yellow Book Yellow Book – – Plant & DesignPlant & Design--BuildBuild

Silver Book Silver Book – – EPC / Turnkey EPC / Turnkey

Short Form of ContractShort Form of Contract

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c) ICEc) ICE

BackgroundBackground The Institution of Civil Engineers The Institution of Civil Engineers

ICE / Association of Consulting Engineers /ICE / Association of Consulting Engineers /Civil Engineering Contractors AssociationCivil Engineering Contractors Association

1st ed1st ed – – 19451945

UK UK – – Major engineering projectsMajor engineering projects

Main types of contracts and featuresMain types of contracts and features ICE Conditions of Contract: Measurement Version (7thICE Conditions of Contract: Measurement Version (7th

edition 1999)edition 1999)

ICE Design & Construct Conditions of Contract (2nd editionICE Design & Construct Conditions of Contract (2nd edition2001)2001)

Other formsOther forms

Hong Kong Government FormHong Kong Government Form

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d) NECd) NEC

BackgroundBackground New Engineering ContractNew Engineering Contract

1980s1980s -- Debates within ICEDebates within ICE

Focus:Focus: Obligations / Responsibilities of partiesObligations / Responsibilities of parties

vs vs

Project Management / Promote Cooperation /Project Management / Promote Cooperation /

Reduction of ConfrontationReduction of Confrontation Main types of contractsMain types of contracts

NEC Engineering & Construction ContractNEC Engineering & Construction Contract

NEC Engineering & Construction SubNEC Engineering & Construction Sub--ContractContract

Endorsed in the UK Endorsed in the UK UK Office of Government CommerceUK Office of Government Commerce

London Olympic Delivery Authority London Olympic Delivery Authority

Promoted by HK Promoted by HK GovtGovt

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IV Why Getting the Right Form isIV Why Getting the Right Form is



IV. Why Getting the Right Form isIV. Why Getting the Right Form is

Important?Important?

Contracts govern:Contracts govern: time time ,, cost cost && quality quality

Impact of the right contractImpact of the right contract

Risk exposure and allocationRisk exposure and allocation Site / Market conditionsSite / Market conditions

Responsibilities of the partiesResponsibilities of the parties

E.g. time limits for written noticesE.g. time limits for written notices

Governing law and dispute resolutionGoverning law and dispute resolution

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Why Getting the Right Form isWhy Getting the Right Form is



Why Getting the Right Form isWhy Getting the Right Form is

Important?Important?

An example from the employer An example from the employer’’s perspectives perspective

If he assumes design responsibility If he assumes design responsibility

EngageEngage Engineer / ArchitectEngineer / Architect

Pricing: LumpPricing: Lump--sum /sum / RemeasurementRemeasurement / Reimbursement/ Reimbursement

LumpLump--SumSum – – eg eg . HKIS/HKIA Standard Form. HKIS/HKIA Standard Form

ReimbursementReimbursement – – eg.NECeg.NEC Costs Reimbursable ContractCosts Reimbursable Contract

If he doesIf he does not not assume design responsibility assume design responsibility

Eg Eg . FIDIC. FIDIC – – Yellow Book Yellow Book

Eg Eg . FIDIC. FIDIC – – Silver Book Silver Book

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Part 2:Part 2:

New Engineering Contract (NEC)New Engineering Contract (NEC)

(now Engineering and Construction(now Engineering and ConstructionContract (ECC))Contract (ECC))

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New Engineering Contract (NEC)New Engineering Contract (NEC)

I.I. IntroductionIntroduction (by Christy Yiu)(by Christy Yiu)

II.II. Typical Contracts within the NEC ECC family Typical Contracts within the NEC ECC family (by (by

Christy Yiu)Christy Yiu)

III.III. Structure of a Typical NEC ContractStructure of a Typical NEC Contract (by Christy Yiu)(by Christy Yiu)

IV.IV. Other Features of NECOther Features of NEC (by Edmund Chau)(by Edmund Chau)

V. V. Compensation EventsCompensation Events (by Edmund Chau)(by Edmund Chau)

VI. VI. Delay DamagesDelay Damages (by Justin Yuen)(by Justin Yuen)

VII. VII. CriticismsCriticisms (by Justin Yuen)(by Justin Yuen)

VIII. VIII. BenefitsBenefits (by Justin Yuen)(by Justin Yuen)

IX.IX. ConclusionConclusion (by Justin Yuen)(by Justin Yuen)

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I. IntroductionI. Introduction

What is NEC ECC? What is NEC ECC?

Entirely new approachEntirely new approach

Focuses on cooperation and project managementFocuses on cooperation and project management

ObjectivesObjectives

Flexibility Flexibility Good project managementGood project management

Simplicity and clarity Simplicity and clarity

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II Typical Contracts within theII. Typical Contracts within the



II. Typical Contracts within theII. Typical Contracts within the

NEC ECC FamilyNEC ECC Family

Priced ContractPriced Contract – – with Activity Schedule or BQ with Activity Schedule or BQ

Target Cost Contract Target Cost Contract – – with Activity Schedule or BQ with Activity Schedule or BQ

Cost Reimbursable ContractCost Reimbursable Contract

Management ContractManagement Contract

Short ContractShort Contract

Framework ContractFramework Contract

Sub ContractSub Contract Professional Services ContractProfessional Services Contract

Adjudicator Contract Adjudicator Contract

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III. Structure of a Typical NEC ContractIII. Structure of a Typical NEC Contract

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a) Options, Core Clauses anda) Options, Core Clauses and



a) Options, Core Clauses anda) Options, Core Clauses and

Secondary Option ClausesSecondary Option Clauses

Departure from traditional approachDeparture from traditional approach

System of options and clausesSystem of options and clauses

OptionsOptions

Select for a particular projectSelect for a particular project

Core ClausesCore Clauses Basis for a range of construction contractsBasis for a range of construction contracts

Secondary Option ClausesSecondary Option Clauses

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b) What needs to be done by theb) What needs to be done by the



b) What needs to be done by the) y

Employer?Employer?

To create a set of NEC 3 Conditions: To create a set of NEC 3 Conditions:

Select one of the 6 Main OptionsSelect one of the 6 Main Options

Include the 9 Core ClausesInclude the 9 Core Clauses

Specify Dispute Resolution OptionSpecify Dispute Resolution Option

Select Secondary Option ClausesSelect Secondary Option Clauses

Include Secondary Option ZInclude Secondary Option Z

Additional clauses drafted specially for a particular Additional clauses drafted specially for a particular

contractcontract

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) 6 M i O i) 6 M i O i



c) 6 Main Optionsc) 6 Main Options

One of which must be includedOne of which must be included

PurposePurpose

A. A. Priced Contract with Activity SchedulePriced Contract with Activity Schedule

B.B. Priced Contract with BQPriced Contract with BQ

C.C. Target Contract with Activity Schedule Target Contract with Activity Schedule

D.D. Target Contract with BQ Target Contract with BQ

E.E. Cost Reimbursable contractCost Reimbursable contractF.F. Management ContractManagement Contract

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d) 9 C Cld) 9 C Cl



d) 9 Core Clausesd) 9 Core Clauses

1. General1. General

General introductory mattersGeneral introductory matters Early warning procedureEarly warning procedure

2. The Contractor2. The Contractor’’s Main Responsibilitiess Main Responsibilities DesignDesign

EquipmentEquipment

PersonnelPersonnel SubSub--contracting contracting

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d) 9 C Cld) 9 C Cl




3. Time3. Time Key datesKey dates

To meet specification or condition To meet specification or condition

4. Testing and Defects4. Testing and Defects Basic regimeBasic regime

Rectification and acceptanceRectification and acceptance

5. Payment5. Payment PM to assessPM to assess

Assessment dates in Contract Data Assessment dates in Contract Data Certify within 1 week Certify within 1 week

Pay within 3 weeks or the period stated in Contract DataPay within 3 weeks or the period stated in Contract Data

Interest on late paymentsInterest on late payments

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d) 9 C Cld) 9 C r Cl




6. Compensation Events6. Compensation Events

Time and money in each event Time and money in each event

7. Title7. Title

Plant and materialsPlant and materials

8. Risks and Insurance8. Risks and Insurance

EmployerEmployer’’s riskss risks

ContractorContractor’’s riskss risks

Insurance tableInsurance table

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d) 9 C r Cld) 9 Core Clauses




9. Termination9. Termination

Reasons and proceduresReasons and procedures

Situations under which either party may terminateSituations under which either party may terminate In the event of insolvency In the event of insolvency

Situations under which the Contractor may terminateSituations under which the Contractor may terminate

Not paid within 13 weeksNot paid within 13 weeks

Situations under which the Employer may terminateSituations under which the Employer may terminate

Substantially failed to comply with obligationsSubstantially failed to comply with obligations

Not provided a bond or guaranteeNot provided a bond or guarantee

Substantially hindered the Employer or othersSubstantially hindered the Employer or others Substantially broken a health or safety regulationSubstantially broken a health or safety regulation

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e) Dispute Resolution Clausee) Dispute Resolution Clause Options W1 and W2Options W1 and W2

W2 is used when UK Housing Grants, Construction W2 is used when UK Housing Grants, Constructionand Regeneration Act 1996 applies.and Regeneration Act 1996 applies.

f) Secondary Optionsf) Secondary Options May be includedMay be included

RetentionRetention

Delay damages for late completionDelay damages for late completion

Performance bondsPerformance bonds

Advanced payment Advanced payment

Sectional completionSectional completion

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IV. Other FeaturesIV. Other Features

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IV Other FeaturesIV Other Features



IV. Other FeaturesIV. Other Features

a) Project Manager and Supervisora) Project Manager and Supervisor

b) Site Managementb) Site Management

c) Early Completionc) Early Completion

d) Contractord) Contractor’’s Risk for Physical Conditionss Risk for Physical Conditions

e) Terms used in NECe) Terms used in NEC

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NoNo ““the Engineerthe Engineer”” oror ““the Architectthe Architect””

Project ManagerProject Manager

Instruction, payment and compensation eventsInstruction, payment and compensation events

SupervisorSupervisor

standards and quality of work standards and quality of work Legal Duty of PMLegal Duty of PM

NEC: spirit of mutual trust and cooperationNEC: spirit of mutual trust and cooperation

To act impartially between Employer & Contractor To act impartially between Employer & Contractor

Costain Costain v Bechtel [2005] EWHC 1018 v Bechtel [2005] EWHC 1018

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Good site management is achieved by:Good site management is achieved by:

Rapid communicationRapid communication

Many notice requirementsMany notice requirements Regular meetingsRegular meetings

Risk reduction meeting Risk reduction meeting

UpUp--toto--datedate programmesprogrammes Not only Not only

Start date, access date, key dates and completion datesStart date, access date, key dates and completion dates

But alsoBut also Planned completion, order & timing of each operationPlanned completion, order & timing of each operation

PM to accept/ reject in 2 weeksPM to accept/ reject in 2 weeks

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Clause 36.1 of core clausesClause 36.1 of core clauses

The project manager may request The project manager may request

Quotation for accelerating the worksQuotation for accelerating the works

Option X6 of secondary optionsOption X6 of secondary options

Bonus for early completionBonus for early completion


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d) Contractord) Contractor’’s Risk for Physicals Risk for Physical



ConditionsConditions

Contractor shall allow for itContractor shall allow for it

Physical condition not a compensationPhysical condition not a compensation

event, unless,event, unless,

(clause 60.1(12))(clause 60.1(12)) ““....an an experienced contractor experienced contractor would would

have judged at the Contract Date to have such have judged at the Contract Date to have such a small a small chance of occurring chance of occurring that it would have been that it would have been

unreasonable for him to have allowed for it.unreasonable for him to have allowed for it.” ”

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e) Terms used in the NECe) Terms used in the NEC



Different from other formsDifferent from other forms

Examples:Examples:

Problem for interpretationProblem for interpretation

NEC termsNEC termsUsual termsUsual terms

Assessment of a delay to the completion Assessment of a delay to the completion

datedate Extension of Time Extension of Time

Delay DamagesDelay DamagesLiquidated Damages Liquidated Damages

An instruction to stop or not to start work An instruction to stop or not to start work Suspension Order Suspension Order

Changing the works informationChanging the works informationVariation Instruction Variation Instruction

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V) Compensation V) Compensation

EventsEvents

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a) Introductiona) Introduction




Core Clause 6Core Clause 6

Deal with at the same clauseDeal with at the same clause

EOT, Loss and Expense and V.O.EOT, Loss and Expense and V.O.

A comprehensive list (clause 60.1) A comprehensive list (clause 60.1)

2 Stages2 Stages Stage 1: NotificationStage 1: Notification

Stage 2: Quotation & AssessmentStage 2: Quotation & Assessment

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Stage 1: NotificationStage 1: Notification



Stage 1: NotificationS ge : No c o

Who and When to notify? Who and When to notify?

Depends on the nature of the EventsDepends on the nature of the Events

(i) Arise from(i) Arise from P.M.P.M.’’ss instructioninstruction

PM at the time of instructionPM at the time of instruction(ii) Others(ii) Others

Contractor to notify a compensation eventContractor to notify a compensation event

if fails to notify within 8 weeksif fails to notify within 8 weeks

Not entitled to change in Prices, Completion Date or a Key DateNot entitled to change in Prices, Completion Date or a Key Date(clause 61.3)(clause 61.3)

Reply to notificationReply to notification

P.M. to reply his decisionP.M. to reply his decision

if fails to reply within 2 weeksif fails to reply within 2 weeks

Treated as acceptance and instruction to give quotation (clause Treated as acceptance and instruction to give quotation (clause 61.4)61.4)

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Stage 2: Quotation & AssessmentStage 2: Quotation & Assessment



Stage 2: Quotat on & ssess entg Q

P.M. may request Contractor to submitP.M. may request Contractor to submit

Time and money implications Time and money implications

Contractor to submit within 3 weeksContractor to submit within 3 weeks

P.M. to reply within 2 weeksP.M. to reply within 2 weeks

Accept or request for revised quotation Accept or request for revised quotation

if P.M. fails to assess within time limitif P.M. fails to assess within time limit

The Contractor may notify P.M. this failure The Contractor may notify P.M. this failure

If P.M. still fails to reply within another 2 weeksIf P.M. still fails to reply within another 2 weeks Treated as accepted by P.M. (clause 62.6) Treated as accepted by P.M. (clause 62.6)

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VI) Delay Damages VI) Delay Damages



) y g) y g

(a)(a) IntroductionIntroduction

(b)(b) Option Clause X7Option Clause X7

(c)(c) Repayment of Delay DamagesRepayment of Delay Damages

(d)(d) Proportioning Down Delay DamagesProportioning Down Delay Damages

(e)(e) EmployerEmployer’’s Benefits Benefit

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))

Only a Secondary Option (Option X7)Only a Secondary Option (Option X7)

If not chosenIf not chosen

If chosenIf chosen

No Certificate of NonNo Certificate of Non--CompletionCompletion

The Rate of Delay Damages The Rate of Delay Damages

Change of Completion DateChange of Completion Date

InterestInterest

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b) Option Clause X7b) Option Clause X7



) p) p

Intended to operate as LDIntended to operate as LD

Rate conforms with rules for LDRate conforms with rules for LD

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c) Repayment of Delay Damagesc) Repayment of Delay Damages



) p y y g) p y y g

Option Clause X7.2 deals with Change of Option Clause X7.2 deals with Change of

Completion DateCompletion Date

Interest Rate not statedInterest Rate not stated

Contract DataContract Data

Clause 51.4Clause 51.4

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d) Proportioning Down Delayd) Proportioning Down Delay

DamagesDamages



DamagesDamages

Deficiency of Option R of NEC2Deficiency of Option R of NEC2

The need and importance for proportioning down The need and importance for proportioning down

Clause X7.3 of NEC 3:Clause X7.3 of NEC 3: ““If the Employer takes over a part of If the Employer takes over a part of the works before Completion, the delay damages are the works before Completion, the delay damages are reduced reduced

from the date on which the part is taken over from the date on which the part is taken over ..””

The rationale The rationale Clause X7.3:Clause X7.3: ““The Project Manager assesses the The Project Manager assesses the

benefit to the Employer benefit to the Employer of taking over the part of the of taking over the part of the

works works as a proportion of the benefit to the Employer as a proportion of the benefit to the Employer of taking over the whole of the works not previously taken over.of taking over the whole of the works not previously taken over.

The delay damages are reduced in this proportion The delay damages are reduced in this proportion ..””

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d) Proportioning Down Delayd) Proportioning Down Delay

DamagesDamages



DamagesDamages

P.M. assesses the EmployerP.M. assesses the Employer’’s Benefits Benefit

The Usual Rule in other Contracts The Usual Rule in other Contracts

The benefit rule in Option Clause X7.3 of NEC The benefit rule in Option Clause X7.3 of NEC

Guidance Notes to NEC3Guidance Notes to NEC3 -- benefits at the time of benefits at the time of

calculationcalculation

Stipulated LD rates: genuine preStipulated LD rates: genuine pre--estimates of lossestimates of loss

Circumstances anticipated at the time of ContractCircumstances anticipated at the time of Contract

Advisable to amend the Option Clause Advisable to amend the Option Clause

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VII) Criticism VII) Criticism



a)a) NECNEC – – Appropriate for All Projects? Appropriate for All Projects?

b)b) What are the Contract Documents? What are the Contract Documents?

c)c) Practical ProblemsPractical Problems

d)d) Language problemLanguage problem -- the use of presentthe use of present

tensetense

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a) NECa) NEC – – Appropriate for All Appropriate for All

P j ?



Projects?Projects?

Different procurement approachesDifferent procurement approaches

Lack of differentiationLack of differentiation Mechanical and Electrical Engineering projectsMechanical and Electrical Engineering projects

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b) What are the Contract Documents?b) What are the Contract Documents?



Contract documentsContract documents not not specifically statedspecifically stated

Discrepancies between various documentsDiscrepancies between various documents

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c) Practical Problemsc) Practical Problems



ProgrammesProgrammes

Compliance with all the requirementsCompliance with all the requirements

SubSub--contractorscontractors

Increase the staffing requirementsIncrease the staffing requirements

Tight timescales Tight timescales

Quoting for future effectsQuoting for future effects

Dealing with contentious mattersDealing with contentious matters

2 Functions of the construction team2 Functions of the construction team

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d) Language problemd) Language problem -- the use of the use of

present tensepresent tense



present tense present tense

In Easily Comprehensible LanguageIn Easily Comprehensible Language – – PresentPresenttense = Present tensetense = Present tense

Clause 11.2(16):Clause 11.2(16): ““Site InformationSite Information isis informationinformation which describes the Site. which describes the Site.””

Statement imposing legal obligationStatement imposing legal obligation e.g. Clause 30.3:e.g. Clause 30.3: ““ The Contractor The Contractor doesdoes the work sothe work so

that the Condition stated for each Key Date is metthat the Condition stated for each Key Date is metby the Key Date.by the Key Date.””

Clause 33.1:Clause 33.1: ““ The Employer The Employer allowsallows access to andaccess to anduse of the Site to the Contractor which is necessary use of the Site to the Contractor which is necessary for the work included in this Contract.for the work included in this Contract.””

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d) Language problemd) Language problem -- the use of the use of

present tensepresent tense



present tense present tense

Statement not imposing legal obligationStatement not imposing legal obligation Clause 61.3:Clause 61.3:

““ The Contractor The Contractor notifiesnotifies the Project Manager of an eventthe Project Manager of an event which has happened or which he expects to happen as a which has happened or which he expects to happen as acompensation event if (a) the Contractor believes that thecompensation event if (a) the Contractor believes that theevent is a compensation event and (b) the Project Managerevent is a compensation event and (b) the Project Manager

has not notified the event to the Contractor.has not notified the event to the Contractor.””

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VIII. Benefits VIII. Benefits



“ “ NEC is a modern day family of contracts that facilitates the NEC is a modern day family of contracts that facilitates the implementation of sound project management principles and implementation of sound project management principles and practices as well as defining legal relationships. Key to the practices as well as defining legal relationships. Key to the

successful use of NEC is users adopting the desired cultural successful use of NEC is users adopting the desired cultural transition. The main aspect of this transition is moving away transition. The main aspect of this transition is moving away from a reactive and hindsight from a reactive and hindsight - - based decision based decision - - making and making and

management approach to one that is management approach to one that is foresight based, foresight based,encouraging a creative environment with proencouraging a creative environment with pro- - active and active and collaborative relationships collaborative relationships ..” ”

Flexibility Flexibility

Clarity and Simplicity Clarity and Simplicity

Stimulus to Good ManagementStimulus to Good Management

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a) Flexibilitya) Flexibility



An all purpose contract An all purpose contract

NonNon--technical languagetechnical language

Choices of pricing mechanismsChoices of pricing mechanisms

A range of secondary options A range of secondary options

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b) Clarity and Simplicityb) Clarity and Simplicity



Different style and structureDifferent style and structure

Simple and nonSimple and non--legalistic languagelegalistic language

Avoid specific terminology Avoid specific terminology

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c) Stimulus to Good Managementc) Stimulus to Good Management



Proactive Project ManagementProactive Project Management

Early Warning Early Warning

Risk RegisterRisk Register

CoCo--operation Clauseoperation Clause

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Proactive Project ManagementProactive Project Management



Partnering approachPartnering approach

Communications and coCommunications and co--operationoperation

UpUp--toto--date agreeddate agreed ProgrammeProgramme

““Managed Project EnvironmentManaged Project Environment””

Improvement and job satisfactionImprovement and job satisfaction

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Early WarningEarly Warning



Clause 16.1Clause 16.1

The mechanism The mechanism

PurposePurpose – – Cooperate and DiscussCooperate and Discuss

Partnering Partnering --based approachbased approach

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Risk RegisterRisk Register



The mechanism The mechanism

Risk reduction meeting Risk reduction meeting PurposePurpose

Proactive risk managementProactive risk management Express purposeExpress purpose

DiscussDiscuss

CoCo

--operateoperate

Encourage proactive risk managementEncourage proactive risk management

3 main objectives3 main objectives Identify risksIdentify risks

Manage risksManage risks Identify time and costIdentify time and cost

The overall effect The overall effect

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CoCo--operation Clauseoperation Clause



Clause 10.1:Clause 10.1: ““ The Employer, the Contractor, the The Employer, the Contractor, the

Project Manager and the Supervisor shall act asProject Manager and the Supervisor shall act as

stated in this contract and in a spirit of mutualstated in this contract and in a spirit of mutualtrust and cotrust and co--operation.operation.””

Improved attitudeImproved attitude

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VI. Conclusion VI. Conclusion



DrawbacksDrawbacks

Onerous requirementsOnerous requirements

BenefitsBenefits A framework for forward planning A framework for forward planning

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END of PART 2END of PART 2

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Gilbert Kwok

LLB (English Law), LLB (PRC Law), FHKIS, FRICS

Partner, Construction & Engineering Group , Li & Partners

and

Justin Yuen / Stephanie Lau / Christy Yiu / Edmund Chau

Members of the Construction & Engineering Group of Li & Partners

Li & Partners

NEC ContractNEC Contract

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NEC 3The perfect contract ?

Matthew Needham-Laing

BA Hons, Dip Arch, MSc, LLB, ARB registered, R.I.B.A

Stevens and Bolton LLP

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• Introduction

– This presentation is intended to provide a briefsummary of the theoretical concepts behind NEC 3,and identify some of the limitations of using this formof contract.

– The presentation has been prepared from theperspective of the law within the United Kingdom.

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• Classical contract theory:

– Parties have freedom of contract; – Parties negotiating to maximise self–interest;

– Parties’ negotiations are influenced by competitivemarket; and

– Allocation of all risks between parties at the time ofcontracting.

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• Relational contract theory

– Parties accept that economic benefit is a result oftheir interdependence;

– Parties obligations toward each other are determinedmore by their relationship rather then their respective

contractual promises; – Parties negotiate on how to handle events in the

future rather than allocate risk at the time ofcontracting.

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• Classical Contracts tend to arise where the

contract is: – Short in duration or single project;

– Limited interaction between parties;

– Measurable outcomes or performance; and

– Minimal future co-operation.

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• Relational Contracts tend to arise where

contract: – Is of long duration or multiple projects

– Requires the preservation of the relationshipbetween parties;

– Has unknown or immeasurable outcomes orperformance; and

– Requires ongoing or future co-operation.

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– NEC 3 has been developed out of and with the intention ofaddressing the circumstances identified in the “relational

contract” theory.

– The relational contract theory relies on the parties co-operating as it is in their commercial interest to do so andthe NEC expressly requires both the parties to the contractand the parties administering the NEC contract to deal witheach other “in a spirit of mutual trust and co-operation ”[Clause 10.1].

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• The duty to co-operate.

– In English law the duty to co-operate is regarded asboth a positive and a negative obligation. The NECis an international contract and therefore the duty toco-operate will be influenced by the law of thecontract chosen by the parties.

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• The positive obligation has been defined by

Lord Blackburn in Mackay v Dick (1881) as: – “…where in a written contract it appears that both

parties have agreed that something shall be done,which cannot effectually be done unless both concur

in doing it, the construction of the contract is that each agrees to do all that is necessary to be done on his part for the carrying out of that thing…”

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• The negative obligation is that party should not interferewith the performance of contract or prevent a personperforming his/her duties under the contract. It has mostfrequently manifested itself in case law in relation theduties of certifiers under contracts, for example it is abreach of contract if the employer interferes with thearchitect/engineer in the performance of those functionswhere the architect/engineer is required to act fairlybetween the employer and the contractor.

– Sutcliffe v Thackrah

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His Honour Humphrey Lloyd Q.C. has

suggested that:• “The phrase mutual trust and co-operation’

imports not only honesty and reasonableness but may also oblige someone to do more than the

contract calls for if the contract is truly to be performed co-operatively ” .

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• The guidance notes to the NEC state:

– “the two principles on which the [NEC] is based and which impact upon the objective of stimulating good management are:

• Foresight applied collaboratively mitigates problems and shrinks risk, and

• Clear division of function and responsibility helps accountability and motivates people to play their part.

A secondary but important theme is that people will be motivated to play their part in collaborative management if it is in their commercial and

professional interest to do so.” [emphasis added]

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• The NEC has, until recently enjoyed a benign economicclimate and has been used satisfactorily:

– By employers either under framework agreements whichlast 3-4 years e.g.:-

• British Airports Authority ‘BAA’ who have until recently usedthe NEC on all their projects with values ranging from £60,000to £50 million; or

• Anglia Water on projects with values ranging from £500,000 to

£2 million – On large projects where a series of contracts are to be let,

e.g.:-• Heathrow Express Tunnel project value £60 million• Channel Tunnel Rail Link, project value £30 billion• The 2012 Olympics.

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• Economic circumstances have changed dramatically inthe last 18 months:

– “The downturn in the construction industry has resulted in a more aggressive and competitive market which has engendered a belief that the best deals are derived from competitive tendering. This has resulted in an increase in open market competition and major construction clients renegotiating or retendering their established frameworks .”

» UK Market Intelligence Autumn 2009

• The current economic climate means that the NEC ismore likely to be used on short duration or singleprojects where there is limited interaction between theparties and little or no prospect of future collaboration.

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– Options available to the Employer when it isno longer in its interest to collaborate:

• Renegotiate framework agreements to reflect thecurrent economic climate. The contractors havelittle choice but to agree.

• Apply the contract terms strictly and disallowcosts where contractually entitled to do so. TheEmployer however has the problem of Costain Ltd v Bechtel Ltd and Mr. Fady Bassily.

• How does applying the contract terms strictlycomply with HHJ Humphrey Lloyd’s view ofclause 10.1?

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• Options available to the Contractor when it is

no longer in its interest to collaborate: – Renegotiate if it can rely upon the obligations inclause 10.1

– Apply the terms of the contract strictly, in particular :

• operate the early warning procedure in clause16.1 to the fullest extent;

• operate the notification of compensation eventsprocedure in clause 61.3 to the fullest extent; and

• assume that all decisions of the Project Manager

will be the subject of an adjudication.

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• Is the NEC robust enough to control the

parties’ relationship when it is not in theircommercial interests to collaborate?

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• The Accepted Programme – Invariably the programme is prepared for tender purposes

and becomes the accepted programme, consequently thecontents of the programme are inadequate due to

• lack of information at tender stage;• contractor has not dedicated sufficient programme resources

at tender stage;• the programme has been prepared to win the tender rather

than build the project; and• further information and detail are identified as being required

from the Employer.

– Result:• Project is difficult to manage without an adequate programme;• The Employer fails to provide information in accordance with

the programme and these are compensation events.

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• Early Warning Notices – The Contract obliges the contractor to give early warning

notices and penalises the contractor if it fails to do so,consequently the:

• Contractor issues an early warning notice in relation to anymatter which potentially affects the project; and

• Early warning notices become treated as a notice of claim.

– Result:• Too many early warning notices for risk reduction meetings to

be held or be effective;• If risk reduction meetings are held then there is insufficient

time/information to manage the risk effectively;• The Risk Register ceases to be a management tool.

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• Compensation Events – The Contractor is required to notify the project manager of

an event which has happened or is expected to happenwithin 8 weeks of becoming aware of the event,consequently:

• The contractor treats all early warnings as notification of acompensation event.

– Result:

• Risk reduction meetings cease to be collaborative;• The Project Manager is unable or has insufficient

time/resource to identify ‘true’ compensation events;• The Project Manager fails to request quotations;

• The Contractor fails to submit quotations in time or at all;• The Project Manager does not assess, or fails to assess the

compensation events correctly.

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• The Project Manager has no power to review any ofhis/her decisions, with the benefit of hindsight, at the

conclusion of the contract, consequently: – The parties must go to adjudication in relation to any

disagreement with the Project Manager’s decision.

• The result if Option W1 is used: – The time periods for referring disputes to adjudication

mean that resources require to manage the project arediverted to deal with disputes, or more resources arerequired.

• The result if Option W2 is used: – The disputes are referred to adjudication at the end.

• Problems of interpreting the contract terms.

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• Summary – The NEC relies upon:

• the parties co-operating because it is in both their economicinterests to do so; and

• sufficient project management resources being provided byboth the Employer and Contractor to operate the contractprocedures and manage risk.

– If the parties fail to co-operate or insufficient project

management resources are allocated to the project then:• the Project Manager is unable to manage the contract

effectively• outturn cost and completion date cease to be predictable;

• disputes arise which must be referred to adjudication.

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• Is the NEC the perfect contract?

– The NEC has been used predominantly byEmployers with considerable influence on theprocurement of construction projects at a time ofeconomic prosperity. At the same time it hasbenefited from a general willingness within the

construction industry to embrace more collaborativemethods of working.

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• Is the NEC the perfect contract? – Changed economic circumstances and the promotion

of the NEC form of contract as suitable for a widevariety of contracts has led to its use on projectswhere it is not necessarily in the interests of one orboth parties to co-operate.

– Where parties fail to co-operate, indications are that

the contract may be no better at preventing disputesthan other established forms of contract and may, byvirtue of the detailed management procedures,encourage the use of formal dispute resolutionprocedures.

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• Bibliography – C.J Goetz & R.E. Scott, The Mitigation Principle: Toward a General Theory of

Contractual Obligation” (1983) 69 Virginia Law Review

– I.R Mac Neil “the New Social Contract “ (New Haven : Yale University Press 1980) – G. Barrie “Private firms embrace NEC for construction” Building, December 1995 – D.M. Giles “The New Engineering Contract, a new Family of Contracts for the new

millennium” National Contracts Management Association Newsletter, June 1996 – S. Furst & V. Ramsey “Keating on Construction Contracts” Eighth Edition (Thomson

Sweet & Maxwell 2006) – A. McInnis “The New Engineering Contract: Relational Contracting, Good Faith and Co-

operation Part 1 & Part 2” ( The International Construction Law Review 2003)

– HHJ Lloyd “Some thoughts on NEC 3” (NEC Users’ Group 2009) – “NEC 3 Engineering and Construction Contract Guidance Notes” (Thomas Telford Ltd) – Turner & Townsend UK Market Intelligence Autumn 2009 – Cases: – Mackay V Dick (1881) 6 App Cas 251 – Sutcliffe v Thackrah [1974] A.C. 727. – (1) Costain Limited (2) O’Rouke Civil Engineering Limited (3) Bachy Soletanche Limited

(4) Emcor Drake & Scull Group Plc V (1) Bechtel Limited (2) Mr Fady Bassily [2005]

EWHC 1018.

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HKIE - Seminar on NEC Contract (011209).

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