hkie - seminar on nec contract (011209)
TRANSCRIPT
7/28/2019 HKIE - Seminar on NEC Contract (011209).
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NEC ContractNEC Contract
Gilbert Kwok Gilbert Kwok
LLB (English Law), LLB (PRC Law), FHKIS, FRICSLLB (English Law), LLB (PRC Law), FHKIS, FRICS
Partner, Construction & Engineering Group , Li & PartnersPartner, Construction & Engineering Group , Li & Partners
andand
Justin Yuen / Stephanie Lau / Christy Yiu / Edmund Chau Justin Yuen / Stephanie Lau / Christy Yiu / Edmund Chau
Members of the Construction & Engineering Group of Li & PartnersMembers of the Construction & Engineering Group of Li & Partners
Li & Partners
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Outline of SeminarOutline of Seminar
IntroductionIntroduction
Part 1Part 1 -- Standard Form ConstructionStandard Form Construction
ContractsContracts
by Gilbert Kwok and Stephanie Lauby Gilbert Kwok and Stephanie Lau
Part 2Part 2 -- New EngineeringNew Engineering
Contract (NEC)Contract (NEC)
by Justin Yuen, Christy Yiu and Edmund Chauby Justin Yuen, Christy Yiu and Edmund Chau
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Part 1:Part 1:
Standard Form Construction ContractsStandard Form Construction Contracts
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IntroductionIntroduction
I. Procurement MethodsI. Procurement Methods (by Gilbert Kwok)(by Gilbert Kwok)
II. Some Types of ContractsII. Some Types of Contracts (by Gilbert Kwok)(by Gilbert Kwok)
III. Forms of Contracts Commonly UsedIII. Forms of Contracts Commonly Used (by (by
Stephanie Lau)Stephanie Lau)
IV. Why Getting the Right Form is Important?IV. Why Getting the Right Form is Important? (by (by Stephanie Lau)Stephanie Lau)
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I. Procurement MethodsI. Procurement Methods
Traditional Traditional
Design and BuildDesign and Build
Management Contracting Management Contracting
Construction ManagementConstruction Management
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TraditionalTraditional
Employer
Main Contractor
Sub-contractors
Consultants
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TraditionalTraditional
FeaturesFeatures
2 sets of contractual relationships2 sets of contractual relationships
ConsultantConsultant’’s roles role Main ContractorMain Contractor’’s responsibility s responsibility
Advantages Advantages
CriticismCriticism
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Design and BuildDesign and Build
Employer
Design and
Build Contractor
Sub-contractors
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Design and BuildDesign and Build
Advantages Advantages
Simple contractual relationshipSimple contractual relationship
Single point responsibility Single point responsibility
Overlap of design and constructionOverlap of design and construction
CriticismCriticism Quality of worksQuality of works
Tendering Tendering
Tamar Development Project Tamar Development Project
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Management ContractingManagement Contracting
Employer
Management
Contractor
Work Package
Sub-contractors
Consultants
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Management ContractManagement Contract
Contractual relationshipContractual relationship
FeaturesFeatures
The project team The project team
Remuneration of the Management ContractorRemuneration of the Management Contractor
Management ContractorManagement Contractor’’s roles and dutiess roles and duties Advantages Advantages
CriticismCriticism
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Construction ManagementConstruction Management
EmployerConstruction
Manager
Work Package
Contractors
Consultants
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Construction ManagementConstruction Management
Contractual relationshipContractual relationship
Distinguishing CM from MCDistinguishing CM from MC
FeaturesFeatures
Advantages Advantages
CriticismCriticism
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II. Some Types of ContractsII. Some Types of Contracts
Lump Sum Fixed Price ContractLump Sum Fixed Price Contract Based on BQBased on BQ
Based on Drawings and SpecificationsBased on Drawings and Specifications Measurement ContractMeasurement Contract
Schedule of RatesSchedule of Rates
Bills of Approximate QuantitiesBills of Approximate Quantities
Reimbursement ContractReimbursement Contract
Option: Guaranteed Maximum Price (GMP)Option: Guaranteed Maximum Price (GMP) Area of dispute Area of dispute
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CIII F f C
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III. Forms of ContractsIII. Forms of Contracts
Commonly UsedCommonly Used
Hong Kong Private SectorHong Kong Private Sector
Hong Kong Public SectorHong Kong Public Sector
InternationalInternational
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Hong Kong Private SectorHong Kong Private Sector
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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Hong Kong Public SectorHong Kong Public Sector
-- HK HK GovtGovt / Public works/ Public works
a)a) General Conditions of Contract for:General Conditions of Contract for:--
Building Works, 1999 EditionBuilding Works, 1999 Edition Civil Engineering Works, 1993 & 1999 EditionCivil Engineering Works, 1993 & 1999 Edition
Design and Build Contract, 1999 EditionDesign and Build Contract, 1999 Edition
E&M Engineering Works, 1999 EditionE&M Engineering Works, 1999 Edition
Term Contracts for Building Works, 2004 Edition Term Contracts for Building Works, 2004 Edition
Term Contracts for Civil Engineering Works, 2002 Edition Term Contracts for Civil Engineering Works, 2002 Edition
Term Contracts for E&M Works, 1994 Edition Term Contracts for E&M Works, 1994 Edition
b)b) SubSub--Contract for Building Works, 2000 EditionContract for Building Works, 2000 Edition
-- ““Government FormsGovernment Forms””
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InternationalInternational
a)a) JCT JCT
b)b) FIDICFIDIC
c)c) ICEICEd)d) NECNEC
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a) JCTa) JCT
BackgroundBackground
Joint Contracts Tribunal Joint Contracts Tribunal
Representative bodies of construction industry Representative bodies of construction industry
History History – – 1919thth Century Century
LatestLatest -- 2005 Edition2005 Edition Criticism: lengthy / complexCriticism: lengthy / complex
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b) FIDICb) FIDIC
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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c) ICEc) ICE
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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d) NECd) NEC
BackgroundBackground New Engineering ContractNew Engineering Contract
1980s1980s -- Debates within ICEDebates within ICE
Focus:Focus: Obligations / Responsibilities of partiesObligations / Responsibilities of parties
vs vs
Project Management / Promote Cooperation /Project Management / Promote Cooperation /
Reduction of ConfrontationReduction of Confrontation Main types of contractsMain types of contracts
NEC Engineering & Construction ContractNEC Engineering & Construction Contract
NEC Engineering & Construction SubNEC Engineering & Construction Sub--ContractContract
Endorsed in the UK Endorsed in the UK UK Office of Government CommerceUK Office of Government Commerce
London Olympic Delivery Authority London Olympic Delivery Authority
Promoted by HK Promoted by HK GovtGovt
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IV Why Getting the Right Form isIV Why Getting the Right Form is
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IV. Why Getting the Right Form isIV. Why Getting the Right Form is
Important?Important?
Contracts govern:Contracts govern: time time ,, cost cost && quality quality
Impact of the right contractImpact of the right contract
Risk exposure and allocationRisk exposure and allocation Site / Market conditionsSite / Market conditions
Responsibilities of the partiesResponsibilities of the parties
E.g. time limits for written noticesE.g. time limits for written notices
Governing law and dispute resolutionGoverning law and dispute resolution
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Why Getting the Right Form isWhy Getting the Right Form is
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Why Getting the Right Form isWhy Getting the Right Form is
Important?Important?
An example from the employer An example from the employer’’s perspectives perspective
If he assumes design responsibility If he assumes design responsibility
EngageEngage Engineer / ArchitectEngineer / Architect
Pricing: LumpPricing: Lump--sum /sum / RemeasurementRemeasurement / Reimbursement/ Reimbursement
LumpLump--SumSum – – eg eg . HKIS/HKIA Standard Form. HKIS/HKIA Standard Form
ReimbursementReimbursement – – eg.NECeg.NEC Costs Reimbursable ContractCosts Reimbursable Contract
If he doesIf he does not not assume design responsibility assume design responsibility
Eg Eg . FIDIC. FIDIC – – Yellow Book Yellow Book
Eg Eg . FIDIC. FIDIC – – Silver Book Silver Book
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Part 2:Part 2:
New Engineering Contract (NEC)New Engineering Contract (NEC)
(now Engineering and Construction(now Engineering and ConstructionContract (ECC))Contract (ECC))
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New Engineering Contract (NEC)New Engineering Contract (NEC)
I.I. IntroductionIntroduction (by Christy Yiu)(by Christy Yiu)
II.II. Typical Contracts within the NEC ECC family Typical Contracts within the NEC ECC family (by (by
Christy Yiu)Christy Yiu)
III.III. Structure of a Typical NEC ContractStructure of a Typical NEC Contract (by Christy Yiu)(by Christy Yiu)
IV.IV. Other Features of NECOther Features of NEC (by Edmund Chau)(by Edmund Chau)
V. V. Compensation EventsCompensation Events (by Edmund Chau)(by Edmund Chau)
VI. VI. Delay DamagesDelay Damages (by Justin Yuen)(by Justin Yuen)
VII. VII. CriticismsCriticisms (by Justin Yuen)(by Justin Yuen)
VIII. VIII. BenefitsBenefits (by Justin Yuen)(by Justin Yuen)
IX.IX. ConclusionConclusion (by Justin Yuen)(by Justin Yuen)
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I. IntroductionI. Introduction
What is NEC ECC? What is NEC ECC?
Entirely new approachEntirely new approach
Focuses on cooperation and project managementFocuses on cooperation and project management
ObjectivesObjectives
Flexibility Flexibility Good project managementGood project management
Simplicity and clarity Simplicity and clarity
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II Typical Contracts within theII. Typical Contracts within the
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II. Typical Contracts within theII. Typical Contracts within the
NEC ECC FamilyNEC ECC Family
Priced ContractPriced Contract – – with Activity Schedule or BQ with Activity Schedule or BQ
Target Cost Contract Target Cost Contract – – with Activity Schedule or BQ with Activity Schedule or BQ
Cost Reimbursable ContractCost Reimbursable Contract
Management ContractManagement Contract
Short ContractShort Contract
Framework ContractFramework Contract
Sub ContractSub Contract Professional Services ContractProfessional Services Contract
Adjudicator Contract Adjudicator Contract
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III. Structure of a Typical NEC ContractIII. Structure of a Typical NEC Contract
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a) Options, Core Clauses anda) Options, Core Clauses and
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a) Options, Core Clauses anda) Options, Core Clauses and
Secondary Option ClausesSecondary Option Clauses
Departure from traditional approachDeparture from traditional approach
System of options and clausesSystem of options and clauses
OptionsOptions
Select for a particular projectSelect for a particular project
Core ClausesCore Clauses Basis for a range of construction contractsBasis for a range of construction contracts
Secondary Option ClausesSecondary Option Clauses
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b) What needs to be done by theb) What needs to be done by the
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b) What needs to be done by the) y
Employer?Employer?
To create a set of NEC 3 Conditions: To create a set of NEC 3 Conditions:
Select one of the 6 Main OptionsSelect one of the 6 Main Options
Include the 9 Core ClausesInclude the 9 Core Clauses
Specify Dispute Resolution OptionSpecify Dispute Resolution Option
Select Secondary Option ClausesSelect Secondary Option Clauses
Include Secondary Option ZInclude Secondary Option Z
Additional clauses drafted specially for a particular Additional clauses drafted specially for a particular
contractcontract
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) 6 M i O i) 6 M i O i
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c) 6 Main Optionsc) 6 Main Options
One of which must be includedOne of which must be included
PurposePurpose
A. A. Priced Contract with Activity SchedulePriced Contract with Activity Schedule
B.B. Priced Contract with BQPriced Contract with BQ
C.C. Target Contract with Activity Schedule Target Contract with Activity Schedule
D.D. Target Contract with BQ Target Contract with BQ
E.E. Cost Reimbursable contractCost Reimbursable contractF.F. Management ContractManagement Contract
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d) 9 C Cld) 9 C Cl
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d) 9 Core Clausesd) 9 Core Clauses
1. General1. General
General introductory mattersGeneral introductory matters Early warning procedureEarly warning procedure
2. The Contractor2. The Contractor’’s Main Responsibilitiess Main Responsibilities DesignDesign
EquipmentEquipment
PersonnelPersonnel SubSub--contracting contracting
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d) 9 C Cld) 9 C Cl
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d) 9 Core Clausesd) 9 Core Clauses
3. Time3. Time Key datesKey dates
To meet specification or condition To meet specification or condition
4. Testing and Defects4. Testing and Defects Basic regimeBasic regime
Rectification and acceptanceRectification and acceptance
5. Payment5. Payment PM to assessPM to assess
Assessment dates in Contract Data Assessment dates in Contract Data Certify within 1 week Certify within 1 week
Pay within 3 weeks or the period stated in Contract DataPay within 3 weeks or the period stated in Contract Data
Interest on late paymentsInterest on late payments
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d) 9 C Cld) 9 C r Cl
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d) 9 Core Clausesd) 9 Core Clauses
6. Compensation Events6. Compensation Events
Time and money in each event Time and money in each event
7. Title7. Title
Plant and materialsPlant and materials
8. Risks and Insurance8. Risks and Insurance
EmployerEmployer’’s riskss risks
ContractorContractor’’s riskss risks
Insurance tableInsurance table
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d) 9 C r Cld) 9 Core Clauses
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d) 9 Core Clausesd) 9 Core Clauses
9. Termination9. Termination
Reasons and proceduresReasons and procedures
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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IV. Other FeaturesIV. Other Features
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IV Other FeaturesIV Other Features
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IV. Other FeaturesIV. Other Features
a) Project Manager and Supervisora) Project Manager and Supervisor
b) Site Managementb) Site Management
c) Early Completionc) Early Completion
d) Contractord) Contractor’’s Risk for Physical Conditionss Risk for Physical Conditions
e) Terms used in NECe) Terms used in NEC
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a) Project Manager and Supervisora) Project Manager and Supervisor
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a) Project Manager and Supervisora) Project Manager and Supervisor
NoNo ““the Engineerthe Engineer”” oror ““the Architectthe Architect””
Project ManagerProject Manager
Instruction, payment and compensation eventsInstruction, payment and compensation events
SupervisorSupervisor
standards and quality of work standards and quality of work Legal Duty of PMLegal Duty of PM
NEC: spirit of mutual trust and cooperationNEC: spirit of mutual trust and cooperation
To act impartially between Employer & Contractor To act impartially between Employer & Contractor
Costain Costain v Bechtel [2005] EWHC 1018 v Bechtel [2005] EWHC 1018
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b) Site Managementb) Site Management
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b) Site Managementb) Site Management
Good site management is achieved by:Good site management is achieved by:
Rapid communicationRapid communication
Many notice requirementsMany notice requirements Regular meetingsRegular meetings
Risk reduction meeting Risk reduction meeting
UpUp--toto--datedate programmesprogrammes Not only Not only
Start date, access date, key dates and completion datesStart date, access date, key dates and completion dates
But alsoBut also Planned completion, order & timing of each operationPlanned completion, order & timing of each operation
PM to accept/ reject in 2 weeksPM to accept/ reject in 2 weeks
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c) Early Completionc) Early Completion
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Clause 36.1 of core clausesClause 36.1 of core clauses
The project manager may request The project manager may request
Quotation for accelerating the worksQuotation for accelerating the works
Option X6 of secondary optionsOption X6 of secondary options
Bonus for early completionBonus for early completion
c) Early Completionc) Early Completion
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d) Contractord) Contractor’’s Risk for Physicals Risk for Physical
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ConditionsConditions
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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Different from other formsDifferent from other forms
Examples:Examples:
Problem for interpretationProblem for interpretation
NEC termsNEC termsUsual termsUsual terms
Assessment of a delay to the completion Assessment of a delay to the completion
datedate Extension of Time Extension of Time
Delay DamagesDelay DamagesLiquidated Damages Liquidated Damages
An instruction to stop or not to start work An instruction to stop or not to start work Suspension Order Suspension Order
Changing the works informationChanging the works informationVariation Instruction Variation Instruction
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V) Compensation V) Compensation
EventsEvents
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a) Introductiona) Introduction
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a) Introductiona) Introduction
Core Clause 6Core Clause 6
Deal with at the same clauseDeal with at the same clause
EOT, Loss and Expense and V.O.EOT, Loss and Expense and V.O.
A comprehensive list (clause 60.1) A comprehensive list (clause 60.1)
2 Stages2 Stages Stage 1: NotificationStage 1: Notification
Stage 2: Quotation & AssessmentStage 2: Quotation & Assessment
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Stage 1: NotificationStage 1: Notification
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Stage 1: NotificationS ge : No c o
Who and When to notify? Who and When to notify?
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)
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Stage 2: Quotation & AssessmentStage 2: Quotation & Assessment
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Stage 2: Quotat on & ssess entg Q
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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) y g) y g
(a)(a) IntroductionIntroduction
(b)(b) Option Clause X7Option Clause X7
(c)(c) Repayment of Delay DamagesRepayment of Delay Damages
(d)(d) Proportioning Down Delay DamagesProportioning Down Delay Damages
(e)(e) EmployerEmployer’’s Benefits Benefit
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a) Introductiona) Introduction
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))
Only a Secondary Option (Option X7)Only a Secondary Option (Option X7)
If not chosenIf not chosen
If chosenIf chosen
No Certificate of NonNo Certificate of Non--CompletionCompletion
The Rate of Delay Damages The Rate of Delay Damages
Change of Completion DateChange of Completion Date
InterestInterest
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b) Option Clause X7b) Option Clause X7
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) p) p
Intended to operate as LDIntended to operate as LD
Rate conforms with rules for LDRate conforms with rules for LD
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c) Repayment of Delay Damagesc) Repayment of Delay Damages
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) p y y g) p y y g
Option Clause X7.2 deals with Change of Option Clause X7.2 deals with Change of
Completion DateCompletion Date
Interest Rate not statedInterest Rate not stated
Contract DataContract Data
Clause 51.4Clause 51.4
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d) Proportioning Down Delayd) Proportioning Down Delay
DamagesDamages
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DamagesDamages
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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DamagesDamages
P.M. assesses the EmployerP.M. assesses the Employer’’s Benefits Benefit
The Usual Rule in other Contracts The Usual Rule in other Contracts
The benefit rule in Option Clause X7.3 of NEC The benefit rule in Option Clause X7.3 of NEC
Guidance Notes to NEC3Guidance Notes to NEC3 -- benefits at the time of benefits at the time of
calculationcalculation
Stipulated LD rates: genuine preStipulated LD rates: genuine pre--estimates of lossestimates of loss
Circumstances anticipated at the time of ContractCircumstances anticipated at the time of Contract
Advisable to amend the Option Clause Advisable to amend the Option Clause
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VII) Criticism VII) Criticism
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a)a) NECNEC – – Appropriate for All Projects? Appropriate for All Projects?
b)b) What are the Contract Documents? What are the Contract Documents?
c)c) Practical ProblemsPractical Problems
d)d) Language problemLanguage problem -- the use of presentthe use of present
tensetense
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a) NECa) NEC – – Appropriate for All Appropriate for All
P j ?
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Projects?Projects?
Different procurement approachesDifferent procurement approaches
Lack of differentiationLack of differentiation Mechanical and Electrical Engineering projectsMechanical and Electrical Engineering projects
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b) What are the Contract Documents?b) What are the Contract Documents?
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Contract documentsContract documents not not specifically statedspecifically stated
Discrepancies between various documentsDiscrepancies between various documents
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c) Practical Problemsc) Practical Problems
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ProgrammesProgrammes
Compliance with all the requirementsCompliance with all the requirements
SubSub--contractorscontractors
Increase the staffing requirementsIncrease the staffing requirements
Tight timescales Tight timescales
Quoting for future effectsQuoting for future effects
Dealing with contentious mattersDealing with contentious matters
2 Functions of the construction team2 Functions of the construction team
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d) Language problemd) Language problem -- the use of the use of
present tensepresent tense
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present tense present tense
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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present tense present tense
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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An all purpose contract An all purpose contract
NonNon--technical languagetechnical language
Choices of pricing mechanismsChoices of pricing mechanisms
A range of secondary options A range of secondary options
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b) Clarity and Simplicityb) Clarity and Simplicity
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Different style and structureDifferent style and structure
Simple and nonSimple and non--legalistic languagelegalistic language
Avoid specific terminology Avoid specific terminology
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c) Stimulus to Good Managementc) Stimulus to Good Management
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Proactive Project ManagementProactive Project Management
Early Warning Early Warning
Risk RegisterRisk Register
CoCo--operation Clauseoperation Clause
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Proactive Project ManagementProactive Project Management
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Partnering approachPartnering approach
Communications and coCommunications and co--operationoperation
UpUp--toto--date agreeddate agreed ProgrammeProgramme
““Managed Project EnvironmentManaged Project Environment””
Improvement and job satisfactionImprovement and job satisfaction
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Early WarningEarly Warning
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Clause 16.1Clause 16.1
The mechanism The mechanism
PurposePurpose – – Cooperate and DiscussCooperate and Discuss
Partnering Partnering --based approachbased approach
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Risk RegisterRisk Register
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The mechanism The mechanism
Risk reduction meeting Risk reduction meeting PurposePurpose
Proactive risk managementProactive risk management Express purposeExpress purpose
DiscussDiscuss
CoCo
--operateoperate
Encourage proactive risk managementEncourage proactive risk management
3 main objectives3 main objectives Identify risksIdentify risks
Manage risksManage risks Identify time and costIdentify time and cost
The overall effect The overall effect
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CoCo--operation Clauseoperation Clause
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Clause 10.1:Clause 10.1: ““ The Employer, the Contractor, the The Employer, the Contractor, the
Project Manager and the Supervisor shall act asProject Manager and the Supervisor shall act as
stated in this contract and in a spirit of mutualstated in this contract and in a spirit of mutualtrust and cotrust and co--operation.operation.””
Improved attitudeImproved attitude
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VI. Conclusion VI. Conclusion
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DrawbacksDrawbacks
Onerous requirementsOnerous requirements
BenefitsBenefits A framework for forward planning A framework for forward planning
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END of PART 2END of PART 2
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Gilbert Kwok
LLB (English Law), LLB (PRC Law), FHKIS, FRICS
Partner, Construction & Engineering Group , Li & Partners
and
Justin Yuen / Stephanie Lau / Christy Yiu / Edmund Chau
Members of the Construction & Engineering Group of Li & Partners
Li & Partners
NEC ContractNEC Contract
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NEC 3The perfect contract ?
Matthew Needham-Laing
BA Hons, Dip Arch, MSc, LLB, ARB registered, R.I.B.A
Stevens and Bolton LLP
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• Introduction
– 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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• Classical contract theory:
– Parties have freedom of contract; – Parties negotiating to maximise self–interest;
– Parties’ negotiations are influenced by competitivemarket; and
– Allocation of all risks between parties at the time ofcontracting.
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• Relational contract theory
– Parties accept that economic benefit is a result oftheir interdependence;
– Parties obligations toward each other are determinedmore by their relationship rather then their respective
contractual promises; – Parties negotiate on how to handle events in the
future rather than allocate risk at the time ofcontracting.
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• Classical Contracts tend to arise where the
contract is: – Short in duration or single project;
– Limited interaction between parties;
– Measurable outcomes or performance; and
– Minimal future co-operation.
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• Relational Contracts tend to arise where
contract: – Is of long duration or multiple projects
– Requires the preservation of the relationshipbetween parties;
– Has unknown or immeasurable outcomes orperformance; and
– Requires ongoing or future co-operation.
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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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• The duty to co-operate.
– 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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• The positive obligation has been defined by
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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His Honour Humphrey Lloyd Q.C. has
suggested that:• “The phrase mutual trust and co-operation’
imports not only honesty and reasonableness but may also oblige someone to do more than the
contract calls for if the contract is truly to be performed co-operatively ” .
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• The guidance notes to the NEC state:
– “the two principles on which the [NEC] is based and which impact upon the objective of stimulating good management are:
• Foresight applied collaboratively mitigates problems and shrinks risk, and
• Clear division of function and responsibility helps accountability and motivates people to play their part.
A secondary but important theme is that people will be motivated to play their part in collaborative management if it is in their commercial and
professional interest to do so.” [emphasis added]
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• The NEC has, until recently enjoyed a benign economicclimate and has been used satisfactorily:
– By employers either under framework agreements whichlast 3-4 years e.g.:-
• British Airports Authority ‘BAA’ who have until recently usedthe NEC on all their projects with values ranging from £60,000to £50 million; or
• Anglia Water on projects with values ranging from £500,000 to
£2 million – On large projects where a series of contracts are to be let,
e.g.:-• Heathrow Express Tunnel project value £60 million• Channel Tunnel Rail Link, project value £30 billion• The 2012 Olympics.
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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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• Options available to the Contractor when it is
no longer in its interest to collaborate: – Renegotiate if it can rely upon the obligations inclause 10.1
– Apply the terms of the contract strictly, in particular :
• operate the early warning procedure in clause16.1 to the fullest extent;
• operate the notification of compensation eventsprocedure in clause 61.3 to the fullest extent; and
• assume that all decisions of the Project Manager
will be the subject of an adjudication.
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• Is the NEC robust enough to control the
parties’ relationship when it is not in theircommercial interests to collaborate?
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• The Accepted Programme – Invariably the programme is prepared for tender purposes
and becomes the accepted programme, consequently thecontents of the programme are inadequate due to
• lack of information at tender stage;• contractor has not dedicated sufficient programme resources
at tender stage;• the programme has been prepared to win the tender rather
than build the project; and• further information and detail are identified as being required
from the Employer.
– Result:• Project is difficult to manage without an adequate programme;• The Employer fails to provide information in accordance with
the programme and these are compensation events.
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• Early Warning Notices – The Contract obliges the contractor to give early warning
notices and penalises the contractor if it fails to do so,consequently the:
• Contractor issues an early warning notice in relation to anymatter which potentially affects the project; and
• Early warning notices become treated as a notice of claim.
– Result:• Too many early warning notices for risk reduction meetings to
be held or be effective;• If risk reduction meetings are held then there is insufficient
time/information to manage the risk effectively;• The Risk Register ceases to be a management tool.
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• Compensation Events – The Contractor is required to notify the project manager of
an event which has happened or is expected to happenwithin 8 weeks of becoming aware of the event,consequently:
• The contractor treats all early warnings as notification of acompensation event.
– Result:
• Risk reduction meetings cease to be collaborative;• The Project Manager is unable or has insufficient
time/resource to identify ‘true’ compensation events;• The Project Manager fails to request quotations;
• The Contractor fails to submit quotations in time or at all;• The Project Manager does not assess, or fails to assess the
compensation events correctly.
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• The Project Manager has no power to review any ofhis/her decisions, with the benefit of hindsight, at the
conclusion of the contract, consequently: – The parties must go to adjudication in relation to any
disagreement with the Project Manager’s decision.
• The result if Option W1 is used: – The time periods for referring disputes to adjudication
mean that resources require to manage the project arediverted to deal with disputes, or more resources arerequired.
• The result if Option W2 is used: – The disputes are referred to adjudication at the end.
• Problems of interpreting the contract terms.
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• Summary – The NEC relies upon:
• the parties co-operating because it is in both their economicinterests to do so; and
• sufficient project management resources being provided byboth the Employer and Contractor to operate the contractprocedures and manage risk.
– If the parties fail to co-operate or insufficient project
management resources are allocated to the project then:• the Project Manager is unable to manage the contract
effectively• outturn cost and completion date cease to be predictable;
• disputes arise which must be referred to adjudication.
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• Is the NEC the perfect contract?
– 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]
EWHC 1018.
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