7/28/2019 HKIE - Seminar on NEC Contract (011209). http://slidepdf.com/reader/full/hkie-seminar-on-nec-contract-011209 1/96 NEC Contract NEC Contract Gilbert Kwok Gilbert Kwok LLB (English Law), LLB (PRC Law), FHKIS, FRICS LLB (English Law), LLB (PRC Law), FHKIS, FRICS Partner, Construction & Engineering Group , Li & Partners Partner, Construction & Engineering Group , Li & Partners and and Justin Yuen / Stephanie Lau / Christy Yiu / Edmund Chau Justin Yuen / Stephanie Lau / Christy Yiu / Edmund Chau Members of the Construction & Engineering Group of Li & Partners Members of the Construction & Engineering Group of Li & Partners Li & Partners Li & Partners 1
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7/28/2019 HKIE - Seminar on NEC Contract (011209).
Standard Form of Building Contracts ( Standard Form of Building Contracts ( 1986 Edition1986 Edition && 20052005Edition)Edition)
Published by HKIA / HKIS / HKICMPublished by HKIA / HKIS / HKICM
2005 Edition2005 Edition More detailed description of rights/obligationsMore detailed description of rights/obligations Lengthy references: procedures/management requirementsLengthy references: procedures/management requirements
More notice requirementsMore notice requirements
OthersOthers Standard Form of Contract for Minor WorksStandard Form of Contract for Minor Works
Standard Form of Domestic SubStandard Form of Domestic Sub--contractcontract ( published by the( published by the Hong Kong Hong Kong Construction AssociationConstruction Association ) )
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The International Federation of Consulting The International Federation of Consulting
EngineersEngineers
International contextInternational context
Widely used Widely used – – building / engineering work building / engineering work
Main types of Conditions of Contracts (99 Ed)Main types of Conditions of Contracts (99 Ed) Red Book Red Book – – Construction (for Building andConstruction (for Building and
Engineering Works)Engineering Works)
Yellow Book Yellow Book – – Plant & DesignPlant & Design--BuildBuild
Silver Book Silver Book – – EPC / Turnkey EPC / Turnkey
Short Form of ContractShort Form of Contract
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BackgroundBackground The Institution of Civil Engineers The Institution of Civil Engineers
ICE / Association of Consulting Engineers /ICE / Association of Consulting Engineers /Civil Engineering Contractors AssociationCivil Engineering Contractors Association
1st ed1st ed – – 19451945
UK UK – – Major engineering projectsMajor engineering projects
Main types of contracts and featuresMain types of contracts and features ICE Conditions of Contract: Measurement Version (7thICE Conditions of Contract: Measurement Version (7th
edition 1999)edition 1999)
ICE Design & Construct Conditions of Contract (2nd editionICE Design & Construct Conditions of Contract (2nd edition2001)2001)
Other formsOther forms
Hong Kong Government FormHong Kong Government Form
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Situations under which either party may terminateSituations under which either party may terminate In the event of insolvency In the event of insolvency
Situations under which the Contractor may terminateSituations under which the Contractor may terminate
Not paid within 13 weeksNot paid within 13 weeks
Situations under which the Employer may terminateSituations under which the Employer may terminate
Substantially failed to comply with obligationsSubstantially failed to comply with obligations
Not provided a bond or guaranteeNot provided a bond or guarantee
Substantially hindered the Employer or othersSubstantially hindered the Employer or others Substantially broken a health or safety regulationSubstantially broken a health or safety regulation
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e) Dispute Resolution Clausee) Dispute Resolution Clause Options W1 and W2Options W1 and W2
W2 is used when UK Housing Grants, Construction W2 is used when UK Housing Grants, Constructionand Regeneration Act 1996 applies.and Regeneration Act 1996 applies.
f) Secondary Optionsf) Secondary Options May be includedMay be included
RetentionRetention
Delay damages for late completionDelay damages for late completion
Performance bondsPerformance bonds
Advanced payment Advanced payment
Sectional completionSectional completion
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Contractor shall allow for itContractor shall allow for it
Physical condition not a compensationPhysical condition not a compensation
event, unless,event, unless,
(clause 60.1(12))(clause 60.1(12)) ““....an an experienced contractor experienced contractor would would
have judged at the Contract Date to have such have judged at the Contract Date to have such a small a small chance of occurring chance of occurring that it would have been that it would have been
unreasonable for him to have allowed for it.unreasonable for him to have allowed for it.” ”
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e) Terms used in the NECe) Terms used in the NEC
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Depends on the nature of the EventsDepends on the nature of the Events
(i) Arise from(i) Arise from P.M.P.M.’’ss instructioninstruction
PM at the time of instructionPM at the time of instruction(ii) Others(ii) Others
Contractor to notify a compensation eventContractor to notify a compensation event
if fails to notify within 8 weeksif fails to notify within 8 weeks
Not entitled to change in Prices, Completion Date or a Key DateNot entitled to change in Prices, Completion Date or a Key Date(clause 61.3)(clause 61.3)
Reply to notificationReply to notification
P.M. to reply his decisionP.M. to reply his decision
if fails to reply within 2 weeksif fails to reply within 2 weeks
Treated as acceptance and instruction to give quotation (clause Treated as acceptance and instruction to give quotation (clause 61.4)61.4)
P.M. may request Contractor to submitP.M. may request Contractor to submit
Time and money implications Time and money implications
Contractor to submit within 3 weeksContractor to submit within 3 weeks
P.M. to reply within 2 weeksP.M. to reply within 2 weeks
Accept or request for revised quotation Accept or request for revised quotation
if P.M. fails to assess within time limitif P.M. fails to assess within time limit
The Contractor may notify P.M. this failure The Contractor may notify P.M. this failure
If P.M. still fails to reply within another 2 weeksIf P.M. still fails to reply within another 2 weeks Treated as accepted by P.M. (clause 62.6) Treated as accepted by P.M. (clause 62.6)
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VI) Delay Damages VI) Delay Damages
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Deficiency of Option R of NEC2Deficiency of Option R of NEC2
The need and importance for proportioning down The need and importance for proportioning down
Clause X7.3 of NEC 3:Clause X7.3 of NEC 3: ““If the Employer takes over a part of If the Employer takes over a part of the works before Completion, the delay damages are the works before Completion, the delay damages are reduced reduced
from the date on which the part is taken over from the date on which the part is taken over ..””
The rationale The rationale Clause X7.3:Clause X7.3: ““The Project Manager assesses the The Project Manager assesses the
benefit to the Employer benefit to the Employer of taking over the part of the of taking over the part of the
works works as a proportion of the benefit to the Employer as a proportion of the benefit to the Employer of taking over the whole of the works not previously taken over.of taking over the whole of the works not previously taken over.
The delay damages are reduced in this proportion The delay damages are reduced in this proportion ..””
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d) Proportioning Down Delayd) Proportioning Down Delay
DamagesDamages
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In Easily Comprehensible LanguageIn Easily Comprehensible Language – – PresentPresenttense = Present tensetense = Present tense
Clause 11.2(16):Clause 11.2(16): ““Site InformationSite Information isis informationinformation which describes the Site. which describes the Site.””
Statement imposing legal obligationStatement imposing legal obligation e.g. Clause 30.3:e.g. Clause 30.3: ““ The Contractor The Contractor doesdoes the work sothe work so
that the Condition stated for each Key Date is metthat the Condition stated for each Key Date is metby the Key Date.by the Key Date.””
Clause 33.1:Clause 33.1: ““ The Employer The Employer allowsallows access to andaccess to anduse of the Site to the Contractor which is necessary use of the Site to the Contractor which is necessary for the work included in this Contract.for the work included in this Contract.””
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d) Language problemd) Language problem -- the use of the use of
present tensepresent tense
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Statement not imposing legal obligationStatement not imposing legal obligation Clause 61.3:Clause 61.3:
““ The Contractor The Contractor notifiesnotifies the Project Manager of an eventthe Project Manager of an event which has happened or which he expects to happen as a which has happened or which he expects to happen as acompensation event if (a) the Contractor believes that thecompensation event if (a) the Contractor believes that theevent is a compensation event and (b) the Project Managerevent is a compensation event and (b) the Project Manager
has not notified the event to the Contractor.has not notified the event to the Contractor.””
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VIII. Benefits VIII. Benefits
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“ “ NEC is a modern day family of contracts that facilitates the NEC is a modern day family of contracts that facilitates the implementation of sound project management principles and implementation of sound project management principles and practices as well as defining legal relationships. Key to the practices as well as defining legal relationships. Key to the
successful use of NEC is users adopting the desired cultural successful use of NEC is users adopting the desired cultural transition. The main aspect of this transition is moving away transition. The main aspect of this transition is moving away from a reactive and hindsight from a reactive and hindsight - - based decision based decision - - making and making and
management approach to one that is management approach to one that is foresight based, foresight based,encouraging a creative environment with proencouraging a creative environment with pro- - active and active and collaborative relationships collaborative relationships ..” ”
Flexibility Flexibility
Clarity and Simplicity Clarity and Simplicity
Stimulus to Good ManagementStimulus to Good Management
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a) Flexibilitya) Flexibility
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– This presentation is intended to provide a briefsummary of the theoretical concepts behind NEC 3,and identify some of the limitations of using this formof contract.
– The presentation has been prepared from theperspective of the law within the United Kingdom.
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– NEC 3 has been developed out of and with the intention ofaddressing the circumstances identified in the “relational
contract” theory.
– The relational contract theory relies on the parties co-operating as it is in their commercial interest to do so andthe NEC expressly requires both the parties to the contractand the parties administering the NEC contract to deal witheach other “in a spirit of mutual trust and co-operation ”[Clause 10.1].
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– In English law the duty to co-operate is regarded asboth a positive and a negative obligation. The NECis an international contract and therefore the duty toco-operate will be influenced by the law of thecontract chosen by the parties.
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Lord Blackburn in Mackay v Dick (1881) as: – “…where in a written contract it appears that both
parties have agreed that something shall be done,which cannot effectually be done unless both concur
in doing it, the construction of the contract is that each agrees to do all that is necessary to be done on his part for the carrying out of that thing…”
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• The negative obligation is that party should not interferewith the performance of contract or prevent a personperforming his/her duties under the contract. It has mostfrequently manifested itself in case law in relation theduties of certifiers under contracts, for example it is abreach of contract if the employer interferes with thearchitect/engineer in the performance of those functionswhere the architect/engineer is required to act fairlybetween the employer and the contractor.
– Sutcliffe v Thackrah
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• Economic circumstances have changed dramatically inthe last 18 months:
– “The downturn in the construction industry has resulted in a more aggressive and competitive market which has engendered a belief that the best deals are derived from competitive tendering. This has resulted in an increase in open market competition and major construction clients renegotiating or retendering their established frameworks .”
» UK Market Intelligence Autumn 2009
• The current economic climate means that the NEC ismore likely to be used on short duration or singleprojects where there is limited interaction between theparties and little or no prospect of future collaboration.
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– Options available to the Employer when it isno longer in its interest to collaborate:
• Renegotiate framework agreements to reflect thecurrent economic climate. The contractors havelittle choice but to agree.
• Apply the contract terms strictly and disallowcosts where contractually entitled to do so. TheEmployer however has the problem of Costain Ltd v Bechtel Ltd and Mr. Fady Bassily.
• How does applying the contract terms strictlycomply with HHJ Humphrey Lloyd’s view ofclause 10.1?
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– The NEC has been used predominantly byEmployers with considerable influence on theprocurement of construction projects at a time ofeconomic prosperity. At the same time it hasbenefited from a general willingness within the
construction industry to embrace more collaborativemethods of working.
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• Is the NEC the perfect contract? – Changed economic circumstances and the promotion
of the NEC form of contract as suitable for a widevariety of contracts has led to its use on projectswhere it is not necessarily in the interests of one orboth parties to co-operate.
– Where parties fail to co-operate, indications are that
the contract may be no better at preventing disputesthan other established forms of contract and may, byvirtue of the detailed management procedures,encourage the use of formal dispute resolutionprocedures.
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• Bibliography – C.J Goetz & R.E. Scott, The Mitigation Principle: Toward a General Theory of
Contractual Obligation” (1983) 69 Virginia Law Review
– I.R Mac Neil “the New Social Contract “ (New Haven : Yale University Press 1980) – G. Barrie “Private firms embrace NEC for construction” Building, December 1995 – D.M. Giles “The New Engineering Contract, a new Family of Contracts for the new
millennium” National Contracts Management Association Newsletter, June 1996 – S. Furst & V. Ramsey “Keating on Construction Contracts” Eighth Edition (Thomson
Sweet & Maxwell 2006) – A. McInnis “The New Engineering Contract: Relational Contracting, Good Faith and Co-
operation Part 1 & Part 2” ( The International Construction Law Review 2003)
– HHJ Lloyd “Some thoughts on NEC 3” (NEC Users’ Group 2009) – “NEC 3 Engineering and Construction Contract Guidance Notes” (Thomas Telford Ltd) – Turner & Townsend UK Market Intelligence Autumn 2009 – Cases: – Mackay V Dick (1881) 6 App Cas 251 – Sutcliffe v Thackrah [1974] A.C. 727. – (1) Costain Limited (2) O’Rouke Civil Engineering Limited (3) Bachy Soletanche Limited
(4) Emcor Drake & Scull Group Plc V (1) Bechtel Limited (2) Mr Fady Bassily [2005]