The NEC 3 Engineering and Construction Contract

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1 The NEC 3 Engineering and Construction Contract

3 The NEC 3 Engineering and Construction Contract A Commentary Second Edition Brian Eggleston CEng, FICE, FIStructE, FCIArb Blackwell Science

4 2006 Brian Eggleston Blackwell Science, a Blackwell Publishing company Blackwell Science Ltd, 9600 Garsington Road, Oxford OX4 2DQ, UK Tel: +44 (0) Blackwell Publishing Inc., 350 Main Street, Malden, MA , USA Tel: Blackwell Science Asia Pty Ltd, 550 Swanston Street, Carlton, Victoria 3053, Australia Tel: +61 (0) The right of the Author to be identified as the Author of this Work has been asserted in accordance with the Copyright, Designs and Patents Act All rights reserved. No part of this publication may be reproduced, stored in a retrieval system, or transmitted, in any form or by any means, electronic, mechanical, photocopying, recording or otherwise, except as permitted by the UK Copyright, Designs and Patents Act 1988, without the prior permission of the publisher. First published 1996 by Blackwell Science as The New Engineering Contract: A Commentary Reissued in paperback 2000 Second retitled edition published 2006 by Blackwell Science ISBN-10: ISBN-13: Library of Congress Cataloging-in-Publication Data Eggleston, Brian, CEng. The NEC 3 engineering and construction contract : a commentary/brian Eggleston. 2nd ed. p. cm. Rev. ed. of: The new engineering contract Includes bibliographical references and index. ISBN-13: (hardback : alk. paper) ISBN-10: (hardback : alk. paper) 1. Engineering contracts Great Britain. I. Eggleston, Brian, CEng. New engineering contract. II. Title. KD1641.E dc A catalogue record for this title is available from the British Library Set in 10/12 pt Palatino by SNP Best-set Typesetter Ltd, Hong Kong Printed and bound in Great Britain by TJ International, Padstow The publisher s policy is to use permanent paper from mills that operate a sustainable forestry policy, and which has been manufactured from pulp processed using acid-free and elementary chlorine-free practices. Furthermore, the publisher ensures that the text paper and cover board used have met acceptable environmental accreditation standards. For further information on Blackwell Publishing, visit our website:

5 Contents Preface Author s note xi xiii 1 Introduction Development of NEC contracts Characteristics of NEC contracts Structure of the NEC 3 Engineering and Construction Contract Feedback from ECC Changes from ECC Points of interest in NEC Main options Introduction Contract strategy Option A priced contract with activity schedule Option B priced contract with bill of quantities Target contracts generally Options C and D target contracts Option E cost reimbursable contract Option F management contract Option W1 dispute resolution Option W2 dispute resolution 28 3 Secondary option clauses Introduction Option X1 price adjustment for inflation Option X2 changes in the law Option X3 multiple currencies Option X4 parent company guarantee Option X5 sectional completion Option X6 bonus for early completion Option X7 delay damages Option X12 partnering Option X13 performance bond Option X14 advanced payment to the contractor Option X15 limitation of contractor s liability for design Option X16 retention Option X17 low performance damages Option X18 limitation of liability 51

6 vi Contents 3.16 Option X20 key performance indicators Option Y(UK)2 Housing Grants, Construction and Regeneration Act Option Y(UK)3 Contracts (Rights of Third Parties) Act Option Z1 additional conditions 56 4 Contract documents Introduction Entire agreements Clause 12.4 of NEC Construction of contracts generally NEC 3 documentation Essential contract documents Identified and defined terms The contract date Works information Site information Contract data Schedules of cost components Ambiguities and inconsistencies in the contract documents Schedule of clauses referring to the works information 75 5 Key players Introduction Others Actions The employer Express obligations of the employer The project manager Express duties of the project manager The supervisor Express duties of the supervisor Communications The project manager and the supervisor General core clauses Introduction Actions Identified and defined terms Interpretation and the law Communications etc Instructions Adding to the working areas Early warning Ambiguities and inconsistencies 119

7 Contents vii 6.10 Illegal and impossible requirements Prevention Obligations and responsibilities of the contractor Introduction Design obligations, responsibilities and liabilities Providing the works The contractor s design Using the contractor s design Design of equipment People Working with the employer and others Subcontracting Other responsibilities Express obligations of the contractor Express prohibitions on the contractor Time (and related matters) Introduction Starting and completion Programmes Revision of programmes Shortened programmes Access to and use of the site Instructions to stop or not to start work Take-over Acceleration Testing and defects Introduction Definitions and certificates Tests and inspections Testing and inspection before delivery Searching and notifying defects Correcting defects Accepting defects Uncorrected defects Payments Introduction Assessing the amount due Payments Defined cost Payments main option A Payments main option B Payments main option C Payments main option D 207

8 viii Contents 10.9 Payments main option E Payments main option F NEC 3 compensation event schemes Introduction Changes in NEC 3 (from ECC 2) Outline of procedures Defining a compensation event Compensation events as exclusive remedies Fairness of the compensation event procedures Unusual features of the compensation event procedures Listed compensation events Introduction Omissions from the listed events Works information related events Employer s default events Employer s risk events Project manager/supervisor related events Physical conditions Adverse weather Prevention Measurement related events Secondary option clause events Notifying compensation events Introduction Notifications by the project manager Notifications by the contractor Project manager s response to notifications Last date for notification of compensation events Quotations for compensation events Introduction Instructions to submit quotations Instructions for alternative quotations Submission of quotations Status of the contractor s quotations Assessment of compensation events Introduction Changes from ECC General assessment rules Particular assessment rules The project manager s assessments Implementing compensation events Other financial remedies 281

9 Contents ix 16 Title Introduction Employer s title to equipment, plant and materials Marking equipment, plant and materials Removing equipment Objects and materials within the site Risks and insurances Introduction Employer s risks Contractor s risks Repairs Indemnity Insurance cover Insurance policies Contractor s failure to insure Insurance by the employer Termination Introduction Summary of NEC 3 termination provisions Termination for any reason Termination under section Reasons for termination Procedures on termination Amounts due on termination Dispute resolution Introduction Developments in dispute resolution Meaning of dispute Adjudication under Option W Adjudication under Option W Review by the tribunal The Adjudicator s Contract NEC 3 Engineering and Construction Subcontract Introduction Core clauses general Core clauses the subcontractor s main responsibilities Core clauses time Core clauses testing and defects Core clauses payment Core clauses compensation events Core clauses title Core clauses risks and insurance 343

10 x Contents Core clauses termination Dispute resolution NEC 3 family of contracts The contracts NEC 3 Short Contract and Short Subcontract NEC 3 Term Service Contract NEC 3 Framework Contract NEC 3 Professional Services Contract NEC 3 Adjudicator s Contract Concluding comment 354 Table of cases 355 Table of clause references 359

11 Preface In the preface to my 1996 book on the second edition of the New Engineering Contract (ECC 2) I questioned whether it was necessary to scrutinise the detail of the contract when faith in its principles might be more important to users than the detail of its provisions. However, I went on to suggest that if the contract succeeded and gained widespread use then commercial pressures would prevail and the contract would need to be robust enough to withstand detailed analysis and criticism. It was soon evident that ECC 2 was becoming a popular contract of choice for civil engineering works and for building works and its usage remains on an upward curve. It has certainly succeeded. But it was also soon evident that there were problems with the contract, particularly with its compensation event procedures. The need for a third edition was obvious and urgent. NEC 3 took a few years longer than expected to produce. Perhaps this reflected the difficulties of amending clauses written in a unique style with minimalistic drafting. Perhaps remaining true to the original concepts of the contract inhibited change. When NEC 3 did eventually emerge in 2005 it was not the comprehensive revision which might have been expected. Some useful changes to compensation event procedures had been made, a few gaps had been plugged here and there, and a few new clauses added. At first sight it seemed that not much had changed. But getting into the detail revealed a different picture. There has been significant change probably far more than the draftsmen intended and not all of it for the better. My endeavour in writing this book has been to try to explain in ordinary language what the clauses of NEC 3 say and what I think they mean. Not everyone will share my views but if they do no more than provide food for thought I hope they will make some contribution to the use and development of the contract. Brian Eggleston May 2006

13 Author s note Phraseology The New Engineering Contract is a family of contract documents and the proper use of the acronym NEC is as a prefix rather than as the name of any single contract. This book is principally a commentary on the third edition of the NEC Engineering and Construction Contract the main contract in the family. For convenience that contract is referred to throughout this book simply as NEC 3. Its predecessor is referred to as ECC 2. Capitals NEC 3 relies heavily on defined terms which have capital initials and identified terms which are in italics. However, for reasons of style which I hope make for easier reading, capitals and italics have been used sparingly in this book, and therefore both defined terms and identified terms appear usually in ordinary case. Text of NEC 3 Very little of the text of NEC 3 is quoted in this book. I have assumed that readers will have to hand a copy of NEC 3 and the other forms in the family as appropriate. Commentary on the text is against the June 2005 publication of NEC 3. Content of book I have endeavoured to cover in this book all the clauses of NEC 3 and all the changes from ECC 2. I have retained the general layout and some of the content of my book on ECC 2 whilst extending commentary on compensation events from one to five chapters. Table of clause numbers The published version of the NEC 3 contract contains a comprehensive index of subjects referenced to clause numbers. In this book a full table of clause

14 xiv Author s note numbers with descriptions is referenced to chapter sections. The table is set out on pages Readers of this book who wish to have the benefit of a subject index will find it a straightforward matter to move from the subjects in the NEC 3 contract to the chapter sections in this book.

The ICE Conditions of Contract: Seventh Edition. Brian Eggleston CEng, FICE, FIStructE, FCIArb. bblackwell. Science

The ICE Conditions of Contract: Seventh Edition Brian Eggleston CEng, FICE, FIStructE, FCIArb bblackwell Science # Brian Eggleston, 1993, 2001 Blackwell Science Ltd Editorial Offices: Osney Mead, Oxford