My slip, your fall

John Redmond commented that the New Engineering Contract has become an acceptable choice for construction procurement (24 June, page 55). He omitted to mention that the NEC form is often acceptable only because it has been heavily amended in order to achieve the level of certainty required by those concerned.

Is this going to change with the third edition? As John mentioned, one of the main changes relates to compensation events. These are circumstances that allow the contractor to claim additional time and money. There is now a provision in clause 61.3 barring a claim by the contractor if no notice is given within eight weeks of it becoming “aware” of the event in question. There is, of course, ample scope for argument as to when “awareness” has occurred and indeed as to who within the contractor’s organisation has to be aware before that awareness becomes that of the contractor itself.

Compensation events include any breach of contract by the employer. The practical effect of the clause is that the contractor loses any right to make a claim of any kind for breach of contract or for any other compensation event unless it gives the requisite notice in time.

If the contract provides for the payment of liquidated damages – “delay damages” in NEC terminology – the contractor cannot get additional time if it has failed to give the requisite notice. This will be the case even if the delay has been caused by a breach of contract by the employer. This means that the contractor may in certain circumstances pay liquidated damages for delay caused by the employer. The NEC is regarded as a partnering contract. If this is partnering, it is the kind of partnering entered into between the crown prince and the whipping boy – one breaks the rules and other takes the pain.

Even worse, the clause may not even be fully effective. In Peak Construction (Liverpool) Ltd vs McKinney Foundations Ltd it was decided as long ago as 1970 that liquidated damages are not payable by the contractor if part of the delay is the result of the employer’s breach of contract and there is no power in the contract to grant an extension of time. The employer can no longer insist on completion by the contractual completion date and is left to recover such losses as it can prove resulted from delay caused by the contractor.

It is the kind of partnering entered into between the crown prince and the whipping boy – one breaks the rules and other takes the pain

Would that still be true if, as in the case of the NEC, the contract contains a power to extend that cannot be exercised because of a failure of the contractor to give notice? No English case has decided this issue. As Tim Elliott mentioned in one of his articles (page 55, 29 October 2004), an Australian court in the case of Gaymark has already decided that liquidated damages are not payable by the contractor in these circumstances. There is a realistic chance that an English court would do likewise. After all, the purpose of liquidated damages is to compensate the employer for delay caused by the contractor, not to allow the employer to break the contract at the contractor’s expense. In Alghussein Establishment vs Eton College, the House of Lords held in 1988 that clear and express provisions are required to contradict the presumption that a party to a contract should not be able to benefit from its own breach.

In short, a clause designed to achieve certainty when delays occur produces precisely the opposite result. Until there is a definite decision, employers will be faced with these arguments from contractors every time they claim delay damages under the NEC Third Edition.

Employers and contractors alike may prefer to avoid all of this. Partnering principles and good sense suggest a simple amendment of clause 61.3 allowing further time to be granted without notice having been given by the contractor in cases where the employer has been in breach.

A review of one new clause in the Third Edition has thus resulted in a suggestion for an amendment. It looks as though those amendments of the NEC contract will be around for some time to come.