22-03-2010
Is NEC3 the finished product for effective procurement?
Five years on, the following areas still seem to be causing some confusion:
- The proper formation of the contract itself and how to use the various secondary options to achieve the desired risk parameters of the team; and
- The concept of partnering – does anyone know what it means?
It is, of course, all too easy to criticise a particular contract for its failings. Contracts are not meant to be, and cannot be, of the “one size fits” variety. The benefits of NEC3 are clear for all to see and have been covered many times over.
Flexibility vs clarity – they are not mutually exclusive
One of the core features of the NEC3 is, of course, its wide range of secondary options and the ability to incorporate ‘z clauses’ to aid the interface between various disciplines on site.
Inexperience or simply a lack of care may conceivably lead to there being no enforceable contract concluded at all, or at least not in the way parties intended. In terms of adjudication, there may not be a contract sufficiently evidenced in writing to enable an adjudication to take place (a situation which will continue to prevail if the amendments to the Construction Act are ever brought into force).
Problems tend to arise from one or a number of the following issues being overlooked:
- A failure to execute the contract properly, which may have consequences for enforcement as well as insurance cover;
- Vagueness in defining the scope of services to be provided;
- Project specific employer’s risks being ignored or not stated in the Contract Data. This causes the Contractor to complain as it bears the risk of any not so stated;
- The fact that there is simply an obligation to record risk events in the Risk Register; not necessarily to do anything about them. Decision making is not mandatory under core condition 16.3; and
- A lack of proper programming or a failure to adequately set out sectional completion information. Sometimes, parties forget to include secondary option X5, which must be included within the contract if section completion is required.
The practical advice is to get the Contract Data firmed up as soon as it is accepted at tender stage. Why leave it to chance when you are otherwise dedicating so much administrative resource to making the conditions of the contract work?
Partnering – meaning and enforceability
Core condition 10.1 provides the setting for the relationship under NEC3 stating that “The Employer, the Contractor, the Project Manager and the Supervisor shall act as stated in this contract and in the spirit of mutual trust and co-operation.”
The simple problem is, however, what does this clause mean?
It has been suggested that core clause 10.1 comes close to a requirement to act in good faith. This is fine in countries that operate under a civil code which enshrines the duty of each party to act in good faith. Unfortunately, the position is not so simply in common law jurisdictions such as England & Wales where the law is developed by judicial authority.
If you make a partnering agreement too prescriptive, you risk losing the very ethos of partnering. If, on the other hand, the terms are not prescriptive enough, the risk is that the contract becomes too uncertain to be enforceable.
The case of Petromec Inc and Others v Petrobras and Others provides a possible solution to this perennial problem. In that case, Court of Appeal had to consider the whether the parties could be held to an agreement “to negotiate in good faith”.
The Court decided that there was an enforceable agreement on the basis that (i) the requirement was expressly agreed by the parties as part of a contract drawn up by lawyers and (ii) the Court could calculate the cost referred to and so would be able to establish whether there was a lack of good faith on the part of anyone.
This would suggest that partnering is effective when it is measureable. The questions then are (i) what is the standard of care expected of partnering and (ii) how can that be sensibly measured?
It has consistently been the case since Birse Construction v St David Limited, now more than a decade ago, that the English courts will pay attention to the intentions of the parties in determining the standard of care owing to the parties of a partnering arrangement.
Reassuringly, the courts fall back on the basic elements of making out a contract when deciding which written expressions of a partnering agreement or charter have been agreed. Therefore, a Court will look for an intention of the parties to contract at the relevant stage of negotiation, certainty of terms and their completeness to form a legal contract and sufficient indication that these terms have been accepted.
The practical way of avoiding any uncertainty is to agree a list of activities which demonstrate the parties acting in good faith and for the parties to conduct themselves accordingly. In this way, a consistent standard of care can be ascertained should any dispute arise in the future.
Partnering could then be measured by, for example, the use of carefully drafted Key Performance Indicators (“KPIs”) which should include a scale for measuring any gain for a KPI that has been “improved upon”, as envisaged in core condition 20.4.
Overcoming these two areas of confusion is a running battle for many parties when contracting with NEC3. Both problems seem however to have very practical solutions available to them, provided parties adapt their mindset to the specifics of the project in hand before the mad rush to get the first spade in the ground. Used appropriately, NEC3 remains a powerful contractual tool for effective procurement.
*[This article was the subject of a recent seminar at BPE’s offices in Cheltenham – to sign up for forthcoming events, please click here.
- The proper formation of the contract itself and how to use the various secondary options to achieve the desired risk parameters of the team; and
- The concept of partnering – does anyone know what it means?
It is, of course, all too easy to criticise a particular contract for its failings. Contracts are not meant to be, and cannot be, of the “one size fits” variety. The benefits of NEC3 are clear for all to see and have been covered many times over.
Flexibility vs clarity – they are not mutually exclusive
One of the core features of the NEC3 is, of course, its wide range of secondary options and the ability to incorporate ‘z clauses’ to aid the interface between various disciplines on site.
Inexperience or simply a lack of care may conceivably lead to there being no enforceable contract concluded at all, or at least not in the way parties intended. In terms of adjudication, there may not be a contract sufficiently evidenced in writing to enable an adjudication to take place (a situation which will continue to prevail if the amendments to the Construction Act are ever brought into force).
Problems tend to arise from one or a number of the following issues being overlooked:
- A failure to execute the contract properly, which may have consequences for enforcement as well as insurance cover;
- Vagueness in defining the scope of services to be provided;
- Project specific employer’s risks being ignored or not stated in the Contract Data. This causes the Contractor to complain as it bears the risk of any not so stated;
- The fact that there is simply an obligation to record risk events in the Risk Register; not necessarily to do anything about them. Decision making is not mandatory under core condition 16.3; and
- A lack of proper programming or a failure to adequately set out sectional completion information. Sometimes, parties forget to include secondary option X5, which must be included within the contract if section completion is required.
The practical advice is to get the Contract Data firmed up as soon as it is accepted at tender stage. Why leave it to chance when you are otherwise dedicating so much administrative resource to making the conditions of the contract work?
Partnering – meaning and enforceability
Core condition 10.1 provides the setting for the relationship under NEC3 stating that “The Employer, the Contractor, the Project Manager and the Supervisor shall act as stated in this contract and in the spirit of mutual trust and co-operation.”
The simple problem is, however, what does this clause mean?
It has been suggested that core clause 10.1 comes close to a requirement to act in good faith. This is fine in countries that operate under a civil code which enshrines the duty of each party to act in good faith. Unfortunately, the position is not so simply in common law jurisdictions such as England & Wales where the law is developed by judicial authority.
If you make a partnering agreement too prescriptive, you risk losing the very ethos of partnering. If, on the other hand, the terms are not prescriptive enough, the risk is that the contract becomes too uncertain to be enforceable.
The case of Petromec Inc and Others v Petrobras and Others provides a possible solution to this perennial problem. In that case, Court of Appeal had to consider the whether the parties could be held to an agreement “to negotiate in good faith”.
The Court decided that there was an enforceable agreement on the basis that (i) the requirement was expressly agreed by the parties as part of a contract drawn up by lawyers and (ii) the Court could calculate the cost referred to and so would be able to establish whether there was a lack of good faith on the part of anyone.
This would suggest that partnering is effective when it is measureable. The questions then are (i) what is the standard of care expected of partnering and (ii) how can that be sensibly measured?
It has consistently been the case since Birse Construction v St David Limited, now more than a decade ago, that the English courts will pay attention to the intentions of the parties in determining the standard of care owing to the parties of a partnering arrangement.
Reassuringly, the courts fall back on the basic elements of making out a contract when deciding which written expressions of a partnering agreement or charter have been agreed. Therefore, a Court will look for an intention of the parties to contract at the relevant stage of negotiation, certainty of terms and their completeness to form a legal contract and sufficient indication that these terms have been accepted.
The practical way of avoiding any uncertainty is to agree a list of activities which demonstrate the parties acting in good faith and for the parties to conduct themselves accordingly. In this way, a consistent standard of care can be ascertained should any dispute arise in the future.
Partnering could then be measured by, for example, the use of carefully drafted Key Performance Indicators (“KPIs”) which should include a scale for measuring any gain for a KPI that has been “improved upon”, as envisaged in core condition 20.4.
Overcoming these two areas of confusion is a running battle for many parties when contracting with NEC3. Both problems seem however to have very practical solutions available to them, provided parties adapt their mindset to the specifics of the project in hand before the mad rush to get the first spade in the ground. Used appropriately, NEC3 remains a powerful contractual tool for effective procurement.
*[This article was the subject of a recent seminar at BPE’s offices in Cheltenham – to sign up for forthcoming events, please click here.
