UK: NEC Heads East

The NEC3 Engineering and Construction Contract (ECC) has often been hailed as the 'construction contract of the future'. In terms of UK public sector projects, this has rung true; NEC3 is the Office of Government Commerce's contract of choice on construction projects and has been used on many projects such as Heathrow Terminal 5 and the 2012 Olympic Games. In other parts of the world, including Asia, the local or in-house standard form contracts are still very much in use on domestic projects, and FIDIC (or hybrids thereof) dominate the international projects scene. However, in some Asian countries at least, this may be set to change. For example, the Hong Kong government recently completed a pilot run using the ECC on a road drainage project, and is considering NEC3 for many other projects in the pipeline.

Globalisation

While Asia's diverse political and legal landscape makes any generalisation about the regional adoption of a standard form construction contract inappropriate, the globalisation of the construction services industry, the homogenisation of various technical and product standards in parts of the region (this is particularly evident in the ASEAN member countries Indonesia, Malaysia, Philippines, Singapore, Thailand, Brunei Darussalam, Vietnam, Laos PDR, Myanmar and Cambodia. For further discussion on this, see Dr P Chan & A Gunawansa 'Is it the correct time for an ASEAN standard form contract?' (2010) International Construction Law Journal 448), and the increase in foreign investment in many Asian countries (either directly or through public private partnerships)), means that the question of a standardisation in construction contracts is not as far-flung as it may initially seem. The more familiar both employers and contractors are with a form of contract, the less likely (at least in theory) the scope for dispute as to each party's respective roles.

Although published by a UK company, the NEC3 suite of contracts are not intended for use just within the UK. The parties are free to choose what law governs the contract and the contracts are structured so that the 'core' clauses can be used on any project, and then adapted for different pricing structures and regulatory regimes through the use of 'secondary' options. For projects which adopt English law and/or are based in the UK, specific secondary clauses are provided. The contract's 'simple English' approach to drafting is also intended to be easy to translate into other languages.

Unique features

The NEC3 prescribes procedures each party has to follow (including the project manager and the supervisor, who are not parties to the contract), with 'sanctions' imposed in the case of non-compliance.

The compensation event procedure is a good example. ECC core cl 61.3 sets out that 'if the contractor does not notify a compensation event within eight weeks of becoming aware of the event, he is not entitled to a change in the Prices, the Completion Date or a Key Date unless the Project Manager should have notified the event to the Contractor but did not'. While the imposition of a 'time bar' is not unique to the NEC3 (the FIDIC suite of contracts require the contractor to give notice within 28 days of becoming aware), there are features of this and other mechanisms which may come as a surprise to the uninitiated.

The first unique feature is that the project manager is under a duty to notify compensation events. Even if the contractor is aware of the event, if the project manager has not notified him — but should have — the contractor will have a robust defence to the time bar. (Arguments may also be raised in common law countries that this 'time bar' off ends the prevention principle (a party cannot benefit from its own wrong), although recent cases in England have not supported these arguments (see eg Multiplex Construction (UK) Ltd v Honeywell Control Systems Ltd [2007] EWHC 447 and Steria Ltd v Sigma Wireless Communications Ltd [2007] EWHC 3454). The obvious question that arises is which events fall on the project manager to notify? The ECC does not provide answers, but given that a project manager should be abreast of most, if not all, developments on site, it is not too far-fetched to argue that this may encompass most events. To avoid these types of arguments being put forward by unscrupulous contractors, many project managers adopt a 'notify all events' type policy.

Another unique feature is the early warning procedure, which requires both the contractor and the project manager to notify the other on a 'risk register' of risks they become aware of during the course of the works. If, in the project manager's view, the contractor failed to provide an early warning which an experienced contractor would have provided, the project manager is required, when assessing the subsequent compensation event, to evaluate the event as if the contractor 'had given an early warning' (core cl 63.5). Thus, the contractor can be 'sanctioned' twice, both at the early warning and compensation event notification stage. The project manager also does not get out unscathed: a failure to notify may constitute a breach of contract on the part of the employer, which may then constitute a compensation event.

Yet another feature of the ECC which may not be familiar to parties in Asia is the pivotal role of the programme in the administration of the contract; it is the main tool used in assessing time based compensation events (cll 63.3 and 63.7). The exact contractual significance of this document depends on whether it is listed in the contract data. If it is, then particularly in common law countries, it may create both additional obligations on the contractor and place the employer at risk of claims if changes are required to the programme (see, for example, Yorkshire Water Authority v Sir Alfred McAlpine Ltd (1985) 32 BLR 114).

Can it work?

Given the diverse legal traditions in Asia, which include common law, civil law and socialist law traditions, the question arises as to whether the ECC can work effectively under all legal systems. As the NEC3 is in many ways a 'project management' tool, arguably it is more easily adaptable to a host country's legal system than other standard forms, as less reference is generally needed to the underlying law when interpreting the provisions. However, no contract exists in a vacuum and particularly in countries with a civil law tradition, such as Indonesia, Thailand and the Philippines, the relevant requirements of the civil code will need to be fully understood and complied with in addition to the contractual conditions.

In some parts of Asia, the adoption of the NEC3 may also require a cultural shift. In countries such as Malaysia, Singapore and Hong Kong, which have a common law tradition, the standard form contracts were adapted from older versions of the English forms such as the JCT (for building works) and the ICE form (for civil works). These forms of contract are quite adversarial in nature. The NEC3 adopts more of a partnering philosophy, with the parties required to work together 'in a spirit of mutual trust and co-operation' and is drafted so that claims are raised and resolved on a continual basis throughout the project. This dispute resolution process is by way of adjudication, which is uncommon in many Asian countries. In Hong Kong, this option was not included in the pilot run, with mediation, arbitration and dispute resolution advisors used instead.

Underlying concepts

There has been much academic discussion about the legal enforceability of the 'mutual trust' obligation in the context of English law, and whether it is tantamount to a 'good faith' obligation (there is no general requirement in English law for the parties to act in good faith). The English courts have not yet had to consider the exact legal implications of this obligation under an NEC contract, but have recently made clear that the scope of any good faith obligation will very much depend on the context. For example in the recent cases of Mid Essex Hospital Services NHS Trust v Compass Group UK and Ireland Ltd (t/a Medirest) [2013] EWCA Civ 200 and Yam Seng PTE Ltd v International Trade Corporation Ltd [2013] EWHC 111 (QB) the Court of Appeal and High Court respectively looked at the extent to which a good faith type obligation may be implied into a contract. The Court of Appeal took the opportunity to reiterate that no general doctrine of good faith exists in English contract law before interpreting very narrowly the scope of an express good faith obligation.

In contrast, in civil law countries 'good faith' obligations are a fundamental part of most civil codes. In certain respects the NEC3 contract may therefore be more suited to a civil law environment. However, tensions may still arise. The role of the project manager is crucial to the operation of the NEC3. The project manager supervises the works, assesses amounts due, certifies all payments, notifies and evaluates compensation events and accepts or rejects the contractor's programmes (the project manager does not, however, assess the quality of the works, this role is allocated to the supervisor (cll 40, 41 and 42)). Under English law, there is a general duty on the project manager to act 'fairly and impartially' in its certification duties which has been held by the courts to apply to the role of the project manager under NEC3 contracts (see Costain v Bechtel Ltd (2005) EWH 1018 (TCC)). Conversely, in civil law countries the project manager or engineer is best understood as the guardian of the employer's interests. Other international contracts, such as FIDIC, accommodate this difference by imposing a duty of fairness, rather than impartiality, on the certifier. (A duty of impartiality was introduced into the FIDIC Red Book in the 1987 edition, but subsequently removed. The FIDIC Red and Yellow Books now require the engineer to make 'fair' determinations (cl 2.6). For further discussion see Humphrey Lloyd, 'Some thoughts on NEC3' 2008 International Construction Law Journal 468.) The NEC3 does not contain any express requirements that the project manager act impartially or fairly in its certification functions, and therefore the role of the project manager may differ considerably in the civil law context. This may, in turn, create a more adversarial atmosphere, notwithstanding the fact that the parties are to act in 'good faith'.

Public private partnerships

An important feature of the Asian infrastructure landscape is the growing interest in public-private partnerships (PPPs). The use of the NEC3 in privately financed public projects may present difficulties. Equity sponsors and project investors in PPPs require cost certainty in order to calculate returns and make the project bankable, which means that the construction phase needs to be as 'risk free' for the project company as possible.

While Option A of the NEC3 is a fixed price contract (most of the other options operate on a target price or re-measurable basis), the comprehensive list of compensation events under the contract (cl 60.1) and employers' risk events (cl 80.1), as well as the allocation to the employer of responsibility for the contents of the works information (an important contractual document which describes the works and the requirements for any design) (see cll 60.1(1), (14) and cl 80(1)), mean that, without significant amendments, the NEC3 is not currently appropriate for such schemes. (Amendments can be made to the ECC through the use of Z clauses. However, if the contract is amended too heavily it may lose the characteristics which make it attractive in the first place.)

Summary

Given the 'cultural change' required for the NEC3 to function effectively, it is unlikely that there will be a quick or universal adoption of the NEC3 in Asia. The increased use of PPP models may also prove a stumbling block until such time as the NEC3 has a proven track record of minimizing disputes (and therefore risk). That said it seems clear that the NEC3 will feature in the Asian construction landscape moving forward, as the increased interest and use of the NEC3 in Hong Kong demonstrates. Provided it continues to be adopted in a well thought out manner, it may well be on a path to becoming the 'construction contract of the future'.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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