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New Engineering Contract (NEC)

Discuss about the International Construction Contracts and Dissertation.

Standard forms exist in all industries. There can be various reasons for these forms. For instance, a firm may create a specific form to standardize the form of data it receives. Similary, a standard contract saves the extensive work of creating a new one from scratch, and it serves as the best way to eliminate chances of errors and gaps as standard form ensures that all required information is filled. This paper will be focusing on two types of standard forms of contract. The first form is the New Engineering Contract (NEC) form popularly known as the NEC family of contracts. The other form would be the International Federation of Consulting Engineers (FIDIC). Each of these forms has recently undergone modifications hence differing from their predecessors. Thus, this paper will be providing a high-level comparison drawing out the differences between each version of form. Secondly, these forms are different in nature, and they also differ in terms of where they are used and how their structure. Therefore, the paper will provide detailed similarities and differences of both. Before getting to the two main objectives which are comparing the different versions of each and comparing both forms, this paper will first discuss the origin of each form and rationality of their use.

The New Engineering Contract (NEC) was first issued in 1993. The term itself represents a brand name which is a suite of engineering contracts presented by the NEC, a part of Thomas Telford Ltd.  On itself, Thomas Telford Ltd is an owned subsidiary under Institution of Civil Engineers. The NEC issues its first edition contract forms (NEC) in 1993 and later released a second edition in 1995. After issuing the second edition, NEC renamed the main contract form to Engineering and Construction Contract (ECC). However, they retained the term NEC to serve as the brand name that was to guide the entire suite of contracts that were still in development. Later in 2005, NEC released the third edition of the forms of contract called the NEC3. The NEC4 was the published in the 22nd of June 2017 which replaced the NEC3 which had been in place since 2005.[1] Nevertheless, all projects that were started before the release of NEC4 will still remain under NEC3, and NEC also promised to retain its support for the for those projects.[2]

International Federation of Consulting Engineers (FIDIC)

The previous clause 10.1 has been split into two with clause 10.1 remaining with requirements for the parties’ compliance. The second clause became clause 10.1 which deals with mutual trust and cooperation. Changes were also made to Sub-contractor’s definition.[3]

Unlike NEC3, the new version requires PM to explain the reasons for rejecting facts or in the Contractor's programme which would assist the Contractor in making the necessary changes. The risk registers were replaced with early warning register,' and this should be provided within two weeks from the commencement date. Similarly, the new early warning meetings have replaced the risk reduction meetings.[4] Also, unlike NEC3, NEC allow the Contractor to propose changes to PM for the purpose of reducing client’s costs.[5] NEC4 has also introduced new rules prohibiting the Contractor from engaging in corruption.[6] The changes in this section have been particularly necessitated by the occurrence of cases in court questioning the parties spirit of good faith and mutual trust. For instance, some instances required the court to weigh between mutual trust and estoppel.[7] Also, the dispute as to NEC3 clauses 10.1, 10.2 caused the courts in England and Wales to ascertain that the doctrine of ‘‘good faith’’ is not present in contract law, so the parties should expressly state the duties they intend to impose.[8]

Unlike NEC3, NEC4 is giving the client more freedom for subcontracting.[9] In addition, the new changes will require Sub-contractors to wait for the client’s acceptance before their appointment by PM.[10] There is also a new close allowing any of the parties to transfer its rights to a third party. However, clients cannot transfer their rights if the new assignee intends to breach mutual trust or will not cooperate.[11] Issues of transfer of rights and benefits were somehow ambiguous in NEC3 which constantly required the determination of a court or the adjudicator. For instance, the court had to affirm the adjudication decision that rights in construction contract can still be transferred or assigned to other parties.[12] There is also a new clause that restricts the parties from disclosing confidential information made by the parties that concerns their work except where the information is required for the execution of the work provided in the agreement [13] Previously, this provision was ambiguous in NEC3 and its misinterpretation could course one party to suffer injustice. For instance, the court had to compel the defendant to provide the claimant with information regarding the transaction costs in their agreement.[14]

Comparison of NEC and FIDIC Forms of Contract

In NEC4, there would be a deemed acceptance where the PM will not respond to the Contractor's programme within the stipulated time. However, notification for failure must be sent to the PM after which a lapse of one week without response will constitute acceptance.[15]

NEC4 has replaced the NEC3 'testing and defects' part. This clause comes with new obligations for the Contractors to submit quality management systems, quality policy statements, and quality plans to PM.[16] The reason for this amendment was to solve the controversies that was arising in NEC3 regarding issues with defects and quality. For example, some cases required the courts intervention just to decide on the testing regime that the client required the compliance of the Contractor.[17]

Contractors must submit their applications for payments reflecting the actual amount due.  The new clause also has introduced the final account process[18] To solve NEC3 problems over disputed costs, Contractors in NEC4 must inform the PM when they finalize the defined cost. They must also avail the records for review. On the other hand, the PM must provide his or her acceptance or rejection with 13 weeks. The failure would constitute the deemed acceptance. There are different court decisions that led to these amendments. Among them were cases concerned with compensation events. For instance, judge Deeny J talked of compensations that are fair and reasonable.[19] In terms of records and reviews, the judge talked about proof from time-sheets and other materials that can demonstrate what work was done at that period.[20]

NEC4 has a new even where the PM must notify the Contractor over rejection of proposed instructions. The introduced dividing date solves any confusion over shifts from forecast and actual costs, and guides identification of relevant programme.[21]  Cases of compensation events have been handled by different cases regarding NEC3. For example, the Court of Appeal upheld the decision of a lower court and the adjudicator's interpretation regarding issues of compensation event[22]

The NEC4 allows the Contractor to use their client’s materials. However, the use has been restricted only for the work.[23] One of these situations is where a Sub-contractor provided the Contractor with roofing slates, and the Contractor just kept them on site. There was no payment made by the Contractor but the employer paid him. Later the Contractor went to bankrupt and it was upon the court to find out to whom were placed the title of goods. In its decision, the court ruled that the Sub-contractor had not passed goods to the Contractor.[24]

This section has changed “risks” to “liabilities". The clarification of the Contractor's liabilities has been provided[25] The provisions for repair and indemnities have been replaced with the recovery of costs[26] Examples of cases that necessitated this rationale were cases where all risks were policies were typically though to cover the Contractors, Sub-contractors and employers. However, issues of joint names policies on the parties’ liability could cause some complexities. For instance, most of the time courts had to decide whether parties are liable to each other regardless of their joint names policies.[27]

There have been provided a secondary option for client termination under any reason.[28] In addition, clients have also been around to terminate in the cases of corruption.[29] There are various reasons for termination. The most common reason is when the other party has committed a substantial breach or a repudiation. Substantial breaches can be corruption or major defects. For instance, the court allowed a termination when one party produced defective work.[30]

The International Federation of Consulting Engineers is an association formed by consulting engineers that was in 1913.[31]  Fidic’s published its first contract (Red Book) issued in 1957 following it with the second edition in 1969. The third edition was published in 1977, and the fourth edition came in I987, Redbook. After Red Book, FIDIC has also been expanding to match the current demands of the construction. Besides, the contract has also been updated to include other areas such as mechanical and electrical works which is now managed under the 1963 edition (Yellow Book)

Moreover, in 1999, FIDIC released another updated version of their pre-existing suite which became the first version of the new standardized forms (Rainbow Suite). Despite releasing the Rainbow Suite, many people have been opted to working with Yellow Book; this made Yellow Book the most popularly used version.

In the new edition, FIDIC still holds the Engineer as the key person for making engineering determinations.[32] Notably, parties do not have to evoke clause 20 as they can keep referring arising issues to the Engineer. The provisions in the new edition obliges and Engineers to remain neutral when solving claims. They can also talk to the parties either as an individual or jointly to solve the disputes and reach an agreement. Engineers should also adhere to strict time limits while making decisions. Notably, these amendments were made following a decision that Engineer’s determinations pre-requisite to the employer’s entitlement.[33]

The new version has added some more requirements for formalities. This version has added more procedures and additional deadlines. In particular, Contractors are required to provide notices of claims either for money or time. These notices should not be later than 28 days from the date when the Contractor realized the situation for the claim.[34]  These changes were necessitated by Lord Neuberger decision that the termination of the contract by the Contractors was necessary based on the provisions of FIDIC Red Book (1999).[35]

The issue of fit for purpose originates from sub-clause 4.1. This clause is more of an issue to liability for non-conformity. The new draft has included a clause for guiding the Contractor’s indemnities. The rationale behind this modification came when the court of appeal found some difficulties with the interpretation of the previous clause.[36]

FIDIC Yellow Book has provided further details regarding the issue of delays. For instance, the time schedules are now subjected additional requirements.[37] The amendments come following various controversies in court. One example is a decision where the court had to interpret clauses 2.5 and 8.7 in an objective approach to find the parties intention instead of solely relying on the clauses.[38]

These changes allowed the employer decide on a date when the Contractor should ensure that all defects are corrected. Some of the changes introduces are a procedure that the Contractor should take to access the work, issues with preferred dates and employer’s acknowledgement of a proposed date. The rationale behind this change has a background from the case where Contractor was given just one-day extension out of the requested 660 days.[39]

The modification of the DAB’s name indicated FEDIC proactive objective in the avoidance of disputes and their resolution. The extension of approach to disputes has left clause 20 for just employer and their contract claims. Other issues of disputes are now solved under clause 20. The clause has elevated DAB to a stable DAB instead of when it remained as an ad hoc one. Also, the new changes dictate that parties can chose to refer their matter to DAB jointly by requesting for “assistance.” Besides, they can also discuss their matters informally to reach an amicable solution. The amendments also authorize DAB to invite the disputing parties to create a joint referral. However, this only happens if DAB is aware for the dispute. Other provisions include requiring parties to send notices of dissatisfaction (NOD) in case of a DAB’s decision. Parties can also commence arbitrations, and arbitral proceedings can commence while the work is still in progress. The strengthening of DAB has come from various court affirmatives. For instance, the Court of Appeal in Singapore told the parties to comply with the provisions of FIDIC regarding dispute resolution before seeking the court's intervention.[40] In another case, the court gave affirmed the decision of DAB by ordering the respondent to comply with DAB’s orders.

This section is will be comparing NEC4 and Yellow Book2. Like as mentioned above, Yellow Book 2 is a version of contract suite developed by FIDIC. On the other hand. NEC4 is a version of contract suite developed by NEC. Both companies provide standardized forms for the formation of construction contracts.

This section would be more interested in in analyzing both contract forms (NEC4 and Yellow Book 2) focusing on them from a document management perspective. In that way, such a point of view would be necessary to draw the right comparison of the two by evaluating how each form enhances or works against collaboration, Secondly, the by looking at the management perspective, it would be easier to see the efficacy of each form regarding the matters of project delivery. In other words, this section will be analyzing the tools of collaboration and efficacy that each of the forms provide when it comes to project delivery.

Collaboration in project deliveries is an approach that focusing in integration of systems, people, practices and structures to reduce cost while still maximizing the efficacy of the results. Currently, many people are now considering it an evolution where segregated information that was dispersed among different team members is shared together.[41] This revolution is not only reducing disputes among the project development teams, but it is also reducing costs. Thus, project delivery, collaboration and efficacy are now becoming inseparable.

As the construction industry moves towards a collaborative environment, the demand for effective project managements that provide collaborative environment has made it a necessity for NEC and FIDIC to provide such elements in their contract form. The efficacy and the level of collaboration that each form provides have been put to scrutiny by different authors. While comparing the suitability of each form, research has found that NEC most people prefer NEC forms over FIDIC as they have a forward-looking nature, they use clear and straightforward language, they are flexible, and the forms allow project management team to collaborate.[42] FIDIC has also attracted criticism due to the much ambiguity noticed in their language, instructability, complication, and legal phrases.[43]

FIDIC has added a new role requiring the Engineer to consult with other parties while making determination.[44] The new clause allows the Engineer to either consult them individually or jointly. This can enhance collaboration as the Engineer would show the client or the Contractor that their input is valuable. It increases efficiency as disputes and discrepancies can be solved accordingly.

FIDIC has added a new clause that requires either party to notify the Engineer whenever there is a foreseeable event. These are events that can affect work, increase contract pricing or even cause delay. This clause is increasing efficacy in delivery by that if effects are communicated earlier, both parties can talk together to decide how they can alter or prevent the such events.

The new clause 20 now subjects both the employer and the Contractor to time bars.[45] In terms of efficacy, this clause will now provide certainty as earlier determined by the court.[46] This clause will promote collaboration, and ensure that if there are claims, both would be handled as they arise.

The Dispute Adjudication Board (DAB) is now serving as a major tool for efficacy and collaboration in FIDIC. For instance, DAB has provisions that allow parties to refer matters either jointly or request DAB’s assistance.[47] The DAB is also encouraging informal discussion to the parties to try and resolve their matters.

The division of clause 10 into two clauses is part of a move to enhance collaboration and efficiency. In particular, the clause 10.1 urges the parties to comply with the contractual requirements.[48] The clause 10.2 urges the parties to act in good faith.  This clause urges the parties to work together in the spirit of mutual trust and they should cooperate with each other up to the duration of the contract. In the law of contract, the spirit of good faith requires the parties in a contract to avoid their self-interests and focus on the benefits of their contractual arrangements.

The risk programmes cultivated by NEC remain within the scope of early warnings. The benefits of these to the collaboration and efficacy of the project delivery is that early warnings will resolve issues of delayed completion, price increments, delayed meeting or any other outcome that can affect the projects.[49] This provision requires the project manager and the Contractor to work as a team by notifying each othe whenever there are new issues that affect the failure to address them can result to inconveniences.

In an effort to increase collaboration and efficiency, NEC4 has included a provision whereby Contractors can propose to their project managers in cases there are any changes in the scope of client’s work.[50] This new clause allows both the PM and the Contractor to work together to effect the changes made by the client and at the same time update the payment arrangements. Also, the PM can reject or accept the changes based on the Contractor’s proposal and such actions should be communicated back to the Contractor. Again, efficacy in introduced here in a way that changes are communicated as soon as they are required.

The NEC3 also had provisions for solving ambiguities that arise in the contract. The provisions allowed both parties to notify each other whenever such inconsistencies are discovered. The previous requirements provided that the PM must issue new instruction for resolving the inconsistency.[51] However, NEC4 takes this resolution further by clarifying that there is no need for the PM to provide instructions, they just need to state how such errors should be fixed. Notably, the PM would need the authority of the Contractor in case there is a need to alter the contract document. Again, these provisions allow the parties to collaborate, and they provide an environment where the process of resolving ambiguities are not complex. The same also increases the efficacy of the project delivery.

The is a new approach by NEC4 for the parties to forecast on matters that can interfere with the execution of the contract and eliminate them before they come.[52] These events are any situation that can prevent the Contractor from fulfilling the obligations of the contract within the given timeline. Again, by working together to eliminate these events, both parties can focus on delivering quality results.

In NEC3, only the PM who could request for acceleration. The NEC4 has enhanced this efficacy of acceleration by allowing even the Contractor to request acceleration from the PM.[53] When acceleration comes from either side, this not only allows collaboration, but both parties can cause early completion by request acceleration from the other.

The NEC4 enhances the quality of the project delivery through a new provision requiring the Contractor to come up with a quality management system hand it over to the PM.[54] This improvement is an effort that can still contribute to collaboration and improve contractual process hence increasing chances for quality results.

NEC4 has also created another clause that requires the Contractor to apply for the payments. On the part of the PM, he is supposed to consider the application before assessment the date. There is also an application for the interim payments.[55] These new provisions solves problems that previously arose from payment issues.


There is also a requirement for the Contractor to avail inspection records for the purpose of demonstrating the correct assessment for the part of the defined costs.[56] The rationale of this provision is to affect the conclusion of Defined Cost in a timely manner.

The rationale of this new provision has been driven by the general conception that the assessment of payments happens during the course of the execution of the project providing no is no provision for a reviewing the final account progression[57].

These are avenues by which the Contractor will recover addition payments and time extension.[58] The clause allows for the Contractor to receive compensation incase there was additional work or costs which contributes to a better working relationship.

Methods of resolving disputes have been enhanced. There is an option where the Construction Act won’t apply, and an option for situations where the legislation applies.[59] With this, the new provision whereby parties can refer matters to a senior referral will help parties to resolve disputes and continue collaborating. This move will also enhance efficacy as parties would be able to continue trusting each other.

This option has been changed from being a right to a secondary option. It is an element that offers the client a chance to terminate the contract in the case of inconveniences.[60] Downgrading this from a right to a secondary option enhances the relationship between the parties as the client will need to have firm grounds that justify termination.

On analysis, FIDIC still has a lot to do to reach the standard of NEC4 when it comes to collaboration. While designing these forms, both FIDIC and NEC should keep in mind that construction managements are moving towards web-based collaboration deployment. This is an inevitable development as due to technology advances. Comparing FIDIC and NEC, FIDIC has only added four components of collaboration, these are the Engineer’s determinations sub-clause whereby he has to consult with other parties while making determination. The second one is the advance warning requiring advance warnings for communication of any probable feature. The claims and bars for dispute resolutions, and lastly the DAB for dispute management. Despite adding the four FIDIC still cannot match the more than 15 new tools of collaboration for efficiency that have been added in NEC4. In details, NEC4 has the Good Faith Obligation clauses, the Risk and programmes, the value engineering and whole life costs, the inconsistencies in contract documents, the events of prevention, acceleration, quality management, payment, final cost, final assessment, compensation events, dispute resolution and termination. There are alos other sections of collaboration in NEC4 such as the risk, liabilities and insurance, security documents and Sub-contractors, design obligations, and early Contractor involvement. By looking at these additions, NEC4 proves to be the best option as far as collaboration for efficiency in project delivery is concerned.

Conclusion

The objective of this paper was to discuss two main forms of contract, the NEC4 and Yellow Book 2. In this objective, this paper started with explaining the background of each standard form. After that this paper moved to discuss the major changes that have been made from their predecessors. Ultimately, this paper finished by discussing the major differences between the two forms by looking at how each promote collaboration and efficiency in the project delivery.

References

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