The z factor

As children’s author Don Wood once remarked, “stupidity is forever, ignorance can be fixed”. When it comes to the Z clause in NEC contracts, I hope that ignorance - rather than stupidity - is primarily to blame for their misuse.

This clause is a secondary option available in most NEC3 contracts. It is there to enable the parties to agree additional conditions of contract to cater for specific needs relating to the project or type of project. In most cases there is very little need to incorporate Z clauses. NEC contracts were structured to provide flexibility, and they offer a choice of main and secondary options to cater for a range of payment regimes and risk profiles.

For public sector projects, the Office of Government Commerce (OGC) has agreed with NEC a set of standard clauses dealing with matters of confidentiality and security. Other than these, public sector clients should not have need to insert Z clauses.

Another feature of NEC is its simplicity. There is no cross-referencing so that, when you are reading one clause, you do not have to keep your fingers in other pages at the same time. Myriad Z clauses would, inevitably, require a sophisticated system of cross-referencing, especially where they affect a large number of core clauses. In this process there is, of course, the ever-present risk that ambiguity and inconsistency will be introduced, especially where the relevant Z clauses amend the wording within the standard clauses.

One client inserted his old contract into an NEC cover, so he could tell everyone he was complying with Office of government commerce advice to use NEC

According to a leading contracts consultant this was the problem faced by a team engaged by a well-known public sector client. The client had decided to use NEC instead of its old adversarial bespoke contract. The team decided they wanted loads of Z clauses so that the balance of risk was firmly in their client’s favour. After two weeks of intensive drafting to ensure that they had - in their minds - eliminated ambiguity and inconsistency, they gave up. Instead they inserted a capital Z in front of the clause numbers in the old bespoke contract and added a Z clause in the NEC contract stating that the Z clauses in the old contract took precedence over the NEC standard clauses.

Yet another client avoided this altogether by inserting his old contract into an NEC cover, so he could then tell everyone he was complying with OGC’s advice to use NEC!

In this context there is another risk for those inserting Z clauses. In the event of inconsistencies or ambiguities, the relevant Z clauses will be interpreted in a way that is contrary to the interest of the party drafting them. This is the contra proferentum rule that the courts use when interpreting contracts. The rule is also enshrined in the NEC3 Engineering and Construction Contract (ECC) at clause 63.8. An ambiguity or inconsistency may require a change in the works information. Where the project manager instructs such change, the resulting compensation event is assessed in a way that is more favourable to the party that had not provided the works information.

Giles Dixon, a solicitor friend, recently told me that he had come across 90 pages of Z clauses in a subcontract for Tube Lines. The party responsible for this nonsense has immediately generated a tenfold increase in the risk of disputes. My immediate reaction would be to identify possible ambiguities and inconsistencies and have them listed in the risk register (where NEC3 ECC is used). In fact one wonders why NEC was used in the first place. The time and trouble taken to draft 90 pages of Z clauses should have been devoted to drafting a bespoke contract.

What does one do with the ignorant? My solution is to draw up a list of onerous Z clauses in common use and attempt to put a cost against them to reflect the increase in risk. This would include the additional risk contained within the Z clause itself as well as the risk emanating from possible non-compatibility with standard NEC3 clauses. In most cases, I suspect, one would simply have to decide on a percentage uplift on the tendered price by way of a contingency. Is there anyone out there prepared to do this exercise? Once people are shown the cost of their actions, most would think twice before repeating them.

Rudi Klein is a barrister and chief executive of the SEC Group