The Use of NEC Supply Contracts in Off Site Manufacturing
Both off site manufacturers and the buyers of their goods often face problems in determining the basis for the contractual arrangements between them where the goods are required for construction projects.
Manufacturers will wish to use their terms and conditions of supply. Where they are required to accept the form of contract proposed by a contractor or subcontractor of a construction project they sometimes face a contract containing an inappropriate flow down of conditions from the main contract by the contractor.
From a contractor’s perspective particularly on a large project where multiple manufacturers are to be used dealing with either an assortment of bespoke terms from various manufacturers or seeking to determine which provisions of a construction contract should apply to the manufacturer can be time consuming. The contractor will wish the manufacturers to fit in as far as possible with the relevant administrative procedures relevant to applications for payment, quality management systems, site protocol, audit rights and dispute resolution provisions. The Contractor will wish, as far as possible for a consistent approach in gauging the risk profile applicable to the manufacturer, its product and the delivery of the goods being manufactured by it to the approach used for other parts of the supply chain.
NEC4 Supply Contract and Supply Short Contract
The NEC Supply Contract and NEC Supply Short Contract introduced in 2010 and now updated as part of the wider launch in July 2017 of NEC4 sit within the family of construction and engineering contracts but are tailored to be used by the manufacturing supply chain to the construction and engineering industry.
The Supply Contract is a contract for the supply of bespoke or high value items, those designed and manufactured for the project. Examples of the type of products likely to be the subject of such a contract are endless. By way of example the author has recently dealt with pumps, turbines, furnaces and off gas systems for use in the water, and renewables and energy from waste sectors.
A Supply Short Contract is meant to be used for commoditised products and capable of batch supply.
Specific Manufacturing Provisions in the Supply Contract
Whilst there remains a limitation date to be set out within the limitation of liability option the use of Option X25 “Supplier Warranties” is more reflective of the liability of the manufacturer given the nature of the product.
Option X25 provides as follows:
“The Supplier gives the Purchaser warranties for the amounts stated in the Contract Data and in the form set out in the scope. A warranty is given to the Purchaser before Delivery”
Provisions of this nature will help deflect a contractor who cannot understand why a pump fabricator should simply accept a 12 year limitation date in respect of the product.
Obligations to programme the deliveries, undertake factory tests, allow inspections and maintain the programme are all useful provisions which do not often appear on manufacturers’ standard terms.
The customary NEC early warning procedure is tailored to the requirements of the manufacturer and the purchaser by subtle changes to the usual NEC provisions. The parties are to warn of events that may affect the price, delay the delivery or impair the performance of the goods or impair the usefulness of the services to the Purchaser.
Despite the fact that the Supply Contract and Supply Short Contract are not drafted in such a way that they will be considered a “construction contract” for the purposes of the Housing Grants, Construction and Regeneration Act 1996 the contracts contain simple adjudication procedures as the first formal stage of dispute resolution.
The use of the Supply Contract on international projects is made possible through the use of options relating to changes in the law and multiple currencies.
Additionally, the contract was designed to be used easily alongside incoterms, standard form contract terms applicable to delivery, duty payment and insurance arrangements which can be incorporated into the supply contract.
Incoterms® 2010 are the latest and eighth edition of the rules. The 11 trade terms used in Incoterms® 2010 can, in general terms, be seen as varying by degrees in relation to the allocation of costs to buyer and seller in and allocation of risks. In this context Ex Works (EXW) represents the minimum obligation for the Seller and Deliver Duty Paid (DDP) represents the maximum obligation. Incoterms beginning with “C” or “F” are contracts where the obligations of the seller are undertaken in the country of embarkation. Incoterms beginning with “D” are contracts where the seller is responsible for the goods in the destination country and bears the risks and costs of their transportation.
The document entitled “Preparing a supply Contract Volume 2“ which performs the role of a guidance note provides an example Supply Requirements document which contains a prompt for the relevant incoterm to be selected based on classification, term and delivery place.
Projects requiring a lengthy design and fabrication process are also catered for through the use of options allowing for price adjustment for inflation, advance payment provisions and corresponding advance payment bond provision and project bank accounts.
One valid criticism of the Supply Contract although probably not of the Supply Short Contract is the absence of installation provisions. The drafters of the NEC would argue that an NEC Short Contract form or an NEC Short Subcontract form could be utilised but it is a missed opportunity for simple installation provision as an option clause has not been included.
A further criticism made of the Supply Contract is that the test provisions are too basic. Clause 41 provides a rudimentary test provision but all such test provisions are highly conditional on the nature of the product and the necessary testing stages. Any product requiring, for example, an installation test, cold commissioning, hot commissioning and further final performance tests is likely to require its own specific test regime.
These notes have been prepared for the purpose of articles only. They should not be regarded as a substitute for taking legal advice.