Legal blog: Traps for the unwary

Twelve years ago, the third version of the New Engineering Contract, NEC3, appeared. It is fair to say that it was not exactly employer-friendly. Among other things, it introduced a new “compensation event” (in other words, an event allowing the contractor to recover time and money, in principle) for matters that the contractor could not prevent.

It allowed the contractor a fairly leisurely period of eight weeks in which to give notice of compensation events – albeit coupling this with a stiff “time bar” provision. And it provided for three situations in which a project manager could be deemed to have accepted an event as a compensation event (or to have accepted a contractor’s valuation of it), if that project manager failed to send a notice in time.

How does the new NEC4, published in June, measure up in terms of allocation of risk?

One interesting innovation is the introduction of a new “final account” procedure. The NEC has always tried to avoid the well-known scenario of the parties storing everything up until practical completion, then having a huge bunfight over the final account. The new user guide (no longer “guidance notes”) states: “The parties should of course have been building up to [an assessment of the final amount due] and very little should need to be done to close the account.”

That may be a tad optimistic in practice, but there is no reason why two parties who buy in to the NEC’s philosophy should not achieve that position. 

If the project manager serves his or her assessment a little outside the four weeks, the way is still open for the contractor to serve its assessment, and claim conclusiveness

Under the new regime, the employer’s project manager must make an assessment of the “final amount due” no later than the date when defects are certified to have been made good. If he or she does not do so “within the time allowed”, the contractor may serve its assessment.

Any assessment – including a contractor’s one – that it is “issued within the time stated in the contract” becomes conclusive unless challenged. The challenge must be made within four weeks, by way of an escalating dispute resolution procedure. This starts with reference to the “senior representatives” of the parties, or with adjudication. 

There is a trap for an unwary project manager. If the project manager serves his or her assessment a little outside the four weeks, the way is still open for the contractor to serve its assessment, and claim conclusiveness. 

In the middle of negotiations, the project manager might not appreciate this (particularly as there is no need for any warning notice from the contractor). Once the four-week period has expired, the contractor can claim that its assessment has now become conclusive – leaving the project manager with a red face and an urgent need to contact his or her insurers.

NEC4 also puts pressure on the project manager in other ways. Under clause 31.3, a project manager who delays in notifying acceptance or non-acceptance of a contractor’s programme may be deemed to have accepted it. The contractor must give the project manager a warning notice before this happens, but the effect could be drastic. The programme in the NEC is a particularly significant document, and is the basis for extension of time claims. 

Employers (now referred to as “clients”) will notice three further provisions that have changed in the new form. First, termination at will is now only an option. That shifts the onus somewhat on to employers at the negotiation stage to say why it should be there, as opposed to contractors saying why it should be removed. 

The new contract has certainly made improvements in some areas. However, employers may continue to question the balance of risk

Second, an instruction for acceleration – in the true sense of bringing the completion date forward (as distinct from catching up with existing delay) – had previously been something for which the PM could require the contractor to provide a quotation. Now the PM can do that only if the contractor is prepared, in principle, to consider the proposed change. So acceleration now requires the consent of the parties.

The third changed provision of particular interest to employers – and perhaps the most significant one of the three – is that the contractor now gets paid the cost of providing quotations for a proposed instruction with which the project manager decides not to go ahead.

Employers may be put off investigating possible design changes to the work if they know that they are immediately committing themselves to paying the contractor’s costs of preparing a quotation. Those costs will be unknown to the employer, of course. Excessive costs would be open to challenge, but the employer will still be signing something close to a blank cheque.

The new contract has certainly made improvements in some areas. However, employers may continue to question the balance of risk, and it is consequently unlikely that they will leave the contract unamended.