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Health e-briefing: The Courts consider the NEC form of agreement

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    The NEC3 suite of contracts is increasingly becoming the choice for all public sector procurement of construction and maintenance works.  It is also increasingly being used by the private sector for major engineering projects. 

    The trend towards increased use of the NEC3 suite is partly the result of the Office of Government Commerce endorsement of the NEC for public sector procurement (the endorsement in the 2013 edition now comes from the Construction Clients’ Board).

    Given the increased use of the NEC3 suite of contracts it is perhaps surprising that there are still relatively few examples of judicial scrutiny of the NEC3. The lack of scrutiny causes concerns for some, who worry that interpretation of the terms may prove problematic. With that said in 2012 and 2013 there have been a number of cases before the courts in which NEC3 contracts (and contracts based on the NEC3) have been considered.

    We have given a brief synopsis of some of the recent cases below.

    • Atkins Ltd v Secretary of State for Transport [2013] EWHC 139 (TCC). 

    This case concerned a highways maintenance contract which was based on a heavily amended version of the NEC3 Engineering and Construction Contract (ECC). The contractor was engaged to maintain part of the UK road network and the contract allowed for payment on a broadly lump sum basis.

    The contractor encountered a greater number of potholes than it had expected and it therefore sought to claim extra payment through the contract. The contractor alleged that the large number of potholes in the road network constituted a compensation event. The compensation event in question was similar to the NEC3 ECC clause 60.1(12) (physical conditions).

    The dispute was heard by an adjudicator and was subsequently referred to arbitration. The arbitrator rejected the contractor’s argument. The case came before the courts because the contractor sought to challenge the arbitrator’s decision. 

    Akenhead J considered the compensation event drafting and agreed with the arbitrator concluding that the contract did not support the contractor's claim either in its actual language nor as a matter of "overall businesslike or commercial interpretation".

    In his judgement Akenhead acknowledged the lack of examination by the courts of NEC contracts and noted that the NEC3 conditions “…are used throughout the construction and engineering industries and are highly regarded in the sense that they are perceived by many as providing material support to assist the parties in avoiding disputes and ultimately in resolving any disputes which do arise. There are some siren or other voices which criticise these Conditions for some loose language, which is mostly in the present tense, which can give rise to confusion as to whether and to what extent actual obligations and liabilities actually arise. Very few cases involving material disputes as to the interpretation of the NEC3 Conditions have made their way through to reported court decisions.”

    Despite the lack of reported decisions this judgment showed an arbitrator and the Technology and Construction Court interpreting an NEC based contract without significant difficulty.

    • RWE Npower Renewables Ltd v J N Bentley [2013] EWHC 978 (TCC)

    In this case the parties had entered into an NEC3 ECC, incorporating Main Option B and Secondary Options X5 and X7 (sectional completion and liquidated damages for delay). The key issue in dispute was whether works to a pipeline and pipeline intake were included within section 2 of the works. The contract documents included descriptions of section 2 in the Contract Data and in the Works Information. The contractor argued that the description in the Contract Data should apply, partly because of a priority of documents clause.

    After losing an adjudication the employer sought a declaration under CPR Part 8 that completion of section 2 of the works was defined with reference to a particular part of the Works Information (and not simply with reference to the more limited description in the Contract Data).

    Akenhead J heard the case and agreed with the employer’s position. Akenhead ruled that that the works to the pipeline and pipeline intake were included in section 2. He decided that the contract was to be construed in the usual way “…by reference to all the documents forming part of the Contract.” When the Contract Data was considered together with the Works Information it was possible to interpret the contract without the need to consider a priority of documents clause, because there was no ambiguity.

    Of particular note was a comment made by Akenhead in connection with the language of the NEC3 contract: It needs to be borne in mind that much of the language of these conditions is in the present tense, although that factor does not seem to impact upon contractual interpretation in this case.”

    • SGL Carbon Fibres Ltd v RBG Ltd [2012] ScotCS CSOH19.

    This was a Scottish case. Whilst not strictly binding on the English courts, it has persuasive value.

    The parties entered into the NEC3 ECC to carry out engineering works at its premises in Scotland. However, during the course of the works the parties departed from the contractual payment mechanism. Several disputes then arose between the parties concerning payment.

    The parties agreed to arbitrate their disputes. The arbitrator found that the contractor bore the burden of proof when claiming additional payments above what it had already received and the employer bore the burden of proof when attempting to recover sums allegedly overpaid to the contractor. Any advance agreement of the amount the employer would pay was on an interim basis only and the employer’s approval did not and should not put the parties in any worse position than if the project manager had actually carried out an assessment.

    The employer sought to appeal on the basis that the arbitrator had made an error of law in deciding that the employer bore the burden of proof when trying to recover any overpayment. The appeal was however dismissed, as it was held that a party challenging a certificate bears the burden of proof.

    While the result in this case may not be a surprise, the decision will inform any adjudicator or arbitrator dealing with a payment dispute under the NEC3 ECC or any similar NEC3 contract.

    In the past there have been concerns regarding how the courts will interpret the language of the NEC, but to date the general pattern of case law demonstrates that the courts have not faced significant difficulties interpreting the NEC3.  

    Many would argue that the lack of judicial scrutiny of the NEC is the result of the risk management processes contained in the contracts leading to a reduction in the number of disputes. Our experience has been that disputes concerning the NEC3 suite of contracts crop up frequently, but often these disputes are resolved in adjudication.  

    While it may not be true to say that there are few disputes on contracts based on the NEC3 suite of contracts, it is clear that relatively few disputes make it to the courts. Given the increased use of the NEC3 suite and the continuing tough market conditions, it remains to be seen if this trend will continue.

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