About this turbine you sold me

What form of contract do you use if you want to procure a large item such as a transformer, a turbine or a boiler for a power station? Or complex medical equipment for use in a hospital? There is currently a shortage of standard forms in this area, especially where installation is not included. Many contracts are let on either the supplier’s or the purchaser’s standard terms, often after a fierce battle of forms.

Another option has recently arrived on the scene, namely the NEC3 supply contract. This is aimed at high-value items and is part of the NEC suite, which includes the main NEC engineering and construction contract. It can be used by owners/employers, and also by main contractors and subcontractors. How does it measure up?

For NEC devotees, the format will be familiar. There are the usual nine clauses, together with options for such extras as delay damages, bonds and guarantees, advance payments and changes in law. A key document is the goods information, which will contain the specification for the items in question. There are also supply requirements, in which the purchaser states its requirements for transport and delivery. Instead of the “completion date”, to be found in the standard NEC3 contract, there is a “delivery date”. There are provisions for early warnings; and for compensation events, which the purchaser pays for on a “cost” basis.

Some clauses that one might expect to find in a supply contract are absent. For example, there is nothing that says that if the purchaser wants to reject the items, it must do so within a certain period. Nor is there a time limit on the purchaser’s claims for defects, which suppliers will often want. These time limits are often shorter than the limitation period in a building contract, where there is a greater risk of concealed or latent defects. Similarly, the contract does not deal in detail with what happens if the item malfunctions after installation – apart from requiring the supplier to correct errors within the first year or some other agreed period.

It is a pity that the NEC drafters did not increase the form’s workload by offering at least an option for ‘supply and install’, in such cases, it may lose out to forms such as MF/1 or IChemE

Essentially this is a contract for the design, manufacture, transportation and delivery of large items of kit. It is suitable where the purchaser wants to have a hands-on involvement in the process of supply itself – that is, transportation and delivery. For this reason, the standard NEC clause about programme is included (with some changes). This is important if the purchaser wants to keep a firm grip on the pre-delivery process, as opposed to just having the supplier turn up and deliver on the agreed date.

However, the contract is not suitable where the supplier is also to install or erect the item, or is to provide any substantial services. Nor, without further drafting, could it easily be used where there is to be lengthy testing or commissioning after installation. It is a pity that the NEC drafters did not increase the form’s workload by offering at least an option for “supply and install” or for where the supplier is to be heavily involved in the testing and commissioning process. In such cases, it may lose out to forms such as MF/1, or the IChemE contracts.

Employers or main contractors acting as purchasers should also consider making the same amendments that they might to the NEC3 construction contract. These include cutting down the number of compensation events, striking out the provisions that penalise the purchaser’s representative (here, the “supply manager”) if they forget to respond in time to notices and quotations from the supplier, and restricting the right of the supplier to be compensated for events that they could not reasonably have prevented or allowed for. This last one, in particular, is a potentially wide get-out for suppliers.

However, with or without amendments, this contract will be of interest to main contractors and employers who want a project, and a corresponding supply chain, that is broadly governed by NEC principles. It could also be used for one-off supply contracts unrelated to a larger project. In a market where there are few clear rivals, apart from the home-made terms of suppliers and purchasers, the NEC3 supply contract may eventually prove as popular as its big brother.