Jordan ... choosing contracts.
NEC forms: should we consider them?
01 September 2016
STUART JORDAN* discusses the innovative features of NEC forms as an alternative to the widely preferred Fidic contracts, while analysing their drawbacks.
The construction industry in the Gulf is pretty firm about what kind of contracts it likes to use. Where there is a choice, a Fidic (Fédération Internationale des Ingénieurs-Conseils, which in French stands for International Federation of Consulting Engineers) form is usually the result.
This will often involve using and referencing the standard published form – as it should – but there are also some “bespoke” standard suites of documents out there which are a lot like Fidic.
To be fair, there are not many suitable alternatives. Among the hundreds of standard forms published globally, few are expressly produced for use internationally. One such set of contracts is the New Engineering Contract suite, now in its third edition (NEC/3). This is published by the Institution of Civil Engineers (ICE) in the UK and it boasts support among UK and other governments as a preferred contract form for public works. In truth, this only amounts to pockets of use, mostly in Hong Kong, Australia, New Zealand and South Africa. NEC has certainly not taken over in the Middle East and it is worth asking whether we should consider it. The NEC forms do tend to polarise opinions between strong supporters and vocal critics.
Nobody can fault the NEC publishers for effort: the suite of contracts includes just about any type of contract pricing model ever thought of, including fixed price, cost-plus, management contracting and target cost; then a short main contract, long and short subcontracts, a term service contract, various professional service contracts and a framework contract. The full pack of 18 forms comes in a box. In another box you get 21 different guides and flowchart volumes helping you to understand and use the contracts in the first box. Yes, I know what you’re thinking.
It is interesting, with so many pricing options offered, that the ICE considers just one common set of main contract conditions as being sufficient to cover every procurement model and every sector. Two big points arise from that:
• Firstly, all NEC contracts are intended to cover both building and engineering works; and,
• Secondly, they are all intended to cover both traditional (build-only) and design-construct models.
Other publishers address these differences by producing different forms of contract, which is surely a good thing. The basic ability of a contract to handle (for instance) design submission and review process (in design and build) or a robust performance testing regime, means that large pieces do not have to be changed and added in.
So why is NEC worth looking at? Well, NEC contracts really are innovative. They aim at collaborative working to improve time, cost and quality all at once. Their whole approach is non-adversarial and a lot of that difference is good. The publishers’ own introduction of their contracts is a sign of their priorities, stating that they facilitate “sound project management principles and practices” in front of “as well as defining legal relationships” which makes it look as though the legal part is an afterthought! It may not be intended as such but the essential question for legal advisors is whether NEC represents a clear and comprehensive statement of contractual rights and obligations. Does it actually “define legal relationships”?
The most talked-about feature is the use of the present tense to convey actions in the contract conditions; for instance “The Contractor submits the programme...” instead of “The Contractor shall submit...” or “may submit”, which, of course, does not tell us whether this action is an obligation or an option. This style is deliberate. The publishers’ stated objective is to stick to “plain English”, and to avoid adversarial terms.
Nor, very often, are obligations followed through with provisions for what happens if any given action is not taken. In this and other ways, the NEC is nothing like as complete as other contracts in providing for various situations. Again, this is deliberate, with the publishers preferring to keep the contract conditions short. This leaves out some provisions which are (in my view) essential to reaching a “market standard” and bankable contract – features such as basic standards of work and materials, compliance with applicable law, assignment or comprehensive coverage of ownership and licensing of intellectual property. If this contract really is promoted as being sufficient to cover (for instance) process engineering involving third-party proprietary technology licences, it wouldn’t be my first choice.
The NEC contracts have only seldom been looked at in the English courts but even in these rare instances, some judicial comments have been tough on the NEC drafting style. One senior judge commented that this can give rise to confusion. In another case, a judge gave the best-known piece of criticism of the NEC. He said: speaking “from the point of view of a lawyer, it seems to me to represent a triumph of form over substance”. This is strong criticism of a published form. No published contracts are perfect; courts and lawyers find glitches in them. This, however, was not criticism of an unintended loophole but the legal effectiveness of the whole contract.
The publishers, however, discourage any amendment. They do allow for additional ‘Z’ clauses and the guidance tells us that provisions can be placed into the Works Information. The logic of that is not obvious: Firstly, there needs to be a division between the legal and technical parts of the contract so that both parts work in themselves and don’t overlap. We have all seen the problems where “preliminaries” volumes overlap the conditions by containing legal terms. Secondly, where is the advantage in keeping the conditions artificially short if the rest of the contract is commensurately longer?
There is also no stated hierarchy between the contract documents which, in other contracts, helps to resolve ambiguities.
NEC also makes use of time bars, both on the making of claims (for time extensions and additional money) and on the responses to those claims. A claim can be lost for the contractor’s failure to notify it in time; and a claim can be deemed accepted if the project manager fails to answer it in time. The idea throughout NEC is to get matters such as delay and disruption onto the table and for determinations of entitlement to be made proactively, and to avoid such matters dragging on into the final account. The thinking is that it is better to determine claims entitlement quickly, put it away and move on, even if this is done on incomplete information before the full effect of events is known. The contract goes into detail about how to go about early assessment of claims (“compensation events”) to minimise the danger of inaccurate projections, and this is to be welcomed. All of this has sense to it, even if we are sceptical about the enforceability of time bars in the Gulf region if they cut down otherwise good claims.
In the same way, NEC was innovative in requiring regular updating of programmes to show actual contractor progress, including the impact of delay events. NEC also promotes early warning, risk reduction meetings and other means of forcing the parties to communicate.
Another well-known feature is the mutual obligation on the parties to act “in a spirit of mutual trust and co-operation”. This is generally taken as a “good faith” obligation, which is essentially an unrecognised concept in English Law but is in line with Gulf jurisdictions.
Finally, we should consider the core legal risk profile, clarity on which is essential in any contract. This contract does not encourage clarity, in my view, in part because it contains both a set of compensation events (allowing more time and money) and a separate allocation of contractor risks and employer risks. In my experience, the inclusion of a “risk register” leads the parties to consider risk in the abstract and not in terms of practical questions such as: “Does the contractor get an extension of time for this? More money? If, because of it, the works are defective or don’t perform; who is responsible? What are the sanctions?” There is also the obvious danger that parties will allocate risks in the register, which are at odds with the contract conditions – most importantly, the compensation events.
In conclusion, there are some innovative measures in the NEC, a lot of which have prompted new features in law firms’ bespoke contracts. The use of the NEC form itself is a different matter. In contrast to those innovative features, which aim to promote good project management, I take the view that the features covering basic legal risk do need to be amended as well as supplemented, to meet commercial needs.
Any lawyer has to be able to answer with a degree of certainty when a client asks in relation to a situation: “What happens under the contract?”
* Stuart Jordan is a partner in the Global Projects group of Baker Botts, a leading international law firm. Jordan’s practice focuses on the oil, gas, power, transport, petrochemical, nuclear and construction industries. He has extensive experience in the Middle East, Russia and the UK.
