NEC4 – New Contracts Released

NEC4 – New Contracts Released 

Last month, 12 years after publication of NEC3, the NEC released NEC4, a new suite of contracts intended to replace NEC3.  While the publishers describe the changes as "evolutionary" rather than "revolutionary", they are, nevertheless, significant and will require careful consideration.  Arguably, the biggest development is the release of two entirely new forms of contract.  NEC4 Design Build and Operate Contract (DBO) has been developed because of a perceived increasing demand for contracts extending into the operational phase and to avoid the need for a two-stage approach. The NEC4 Alliance Contract (ALC), which is currently in consultation form, is a contract to be entered into by a number of parties involved in the project to promote collaboration and assimilation (the draft form is available via the NEC's website and the consultation process is now open).

The changes to the existing contracts mostly apply to the entire suite, but will be considered in this article with reference to the widely used Engineering and Construction Contract (the NEC4 ECC).   The main changes are:

• Terminology - There are some significant changes to the terminology that may take some getting used to, for example, "Scope" replaces "Works Information", "Client" replaces "Employer", "Multi-party collaboration" replaces "Partnering".
• Contractor's design option – Reflecting current industry practice, more extensive provisions have been introduced to support design and build contracting (Secondary Option X15), including a requirement for professional indemnity insurance, and a requirement to use the skill and care normally used by professionals designing similar works.  These additions are also intended to reduce excessive use of Z-clauses (as are many of the other changes).  A new secondary optional clause, X9, deals with copyright and provides that, save as provided in the Scope, ownership of material prepared for the design of the works belongs to the Client.
• Option W3: New dispute resolution procedure – The "W" options have been revised and now include new Option W3 which provides for the appointment of a Dispute Avoidance Board.  The Board can consist of 1 or 3 members who are appointed when the contract is made.  The idea is that the Board is familiar with the project from Day 1 and is available throughout the project to assist in solving problems and avoiding formal disputes.  Option W3 bypasses adjudication, i.e., if the Board is unable to facilitate an agreement, the dispute escalates immediately to the tribunal (arbitration or the courts), therefore it cannot be used if the Housing Grants, Construction and Regeneration Act 1996 (HGCRA) applies because of the absolute right where the HGCRA applies to adjudicate at any time.  It is therefore of more relevance on international projects.  An uncertainty within W3, as drafted, is the status of the Board's recommendations.  While they are purportedly non-binding, if a party wishes to refer the matter to arbitration or the courts they must notify the other party within 4 weeks of notification of the Board's recommendations.  W3 doesn't specify what happens if a party fails to notify within the 4 week period.
• Additional changes to the dispute resolution provisions - Also aimed at promoting collaborative and co-operative working, are the revisions to Options W1 and W2 which include a mandatory provision to negotiate prior to implementation of formal proceedings (non-mandatory if the HGCRA applies).  To provide for new Option W3, the NEC3 Adjudicator's Contract has been replaced by a Dispute Resolution Service Contract.
• Contractor's proposals for changes to the Scope and acceleration – New processes have been introduced facilitating the ability of the Contractor and the Project Manager to propose changes during the course of the works to improve the outcome of the project, including an option for the Contractor to share in the cost savings of opportunities that it initiates.
• Payment clauses – Section 5 has been changed to require the Contractor to submit an application in order to recover interim payments.  The payment provisions dealing with the HGCRA have only been modified to deal with the other changes made.
• Finality of assessments –A number of procedures have been introduced which are aimed at reaching agreement on the final amounts due under the contract  For example, there is a new provision at Core Clause 53 whereby the Project Manager is required to issue a final assessment of payment due to the Contractor within 4 weeks of the issue of the Defects Certificate, which becomes conclusive if not referred to dispute resolution within 4 weeks of issue.  If the Project Manager does not issue a final assessment within the 4 week time frame, the Contractor can issue his own final assessment which becomes binding in the same way.  As with some of the other changes, these new provisions underscore the importance of proactive management when using NEC contracts.
• Collateral Warranties – Again, to reflect current industry practice and to cut down on Z clauses, collateral warranties are catered for by way of new Secondary Option X8 (they are referred to as "undertakings").   The NEC have not provided forms of undertaking, and envisage that these will be agreed between the parties and contained in the Scope.
• Early Contractor Involvement (ECI) – A secondary option allowing for ECI was published separately by the NEC in 2015.  It is now incorporated into NEC4 at X22 and designed for use with Options C and E.  Providing for ECI is increasingly seen as a means of helping to identify and eliminate problems and risks from a project and incorporating construction considerations at an early stage.  It is also seen as providing a good foundation for collaboration between the parties.
• BIM – Secondary Option X10 specifically supports the use of BIM.  The BIM option is intended to work independently of a separate protocol, such as the CIC Protocol, however, it envisages that much of the structure will be set out in the Scope, such as the process for creating and changing the information model.  The option covers matters such as who owns the information model, and who is liable for its content, for example, it provides that the Client is responsible for all information contained within the model save for that provided by the Contractor.  
• Quality Management – Section 4 now includes a requirement that the Contractor prepare and issue a quality management system and plan.
• Bribery and corruption – To keep step with legislative requirements, and, again, avoid Z-clauses, Core Clause 18 prohibits the Contractor from committing corrupt acts (but not the Client) and the ECC also provides a specific termination remedy in the event that a corrupt act is carried out.
• Confidentiality and publicity – New Core Clause 29 restricts the disclosure of project information and enables the Contractor to publicise the works only with the Client's agreement.
• Assignment – New Core Clause 28 allows either party to assign the benefits of the contract to another party but the Client's right is caveated such that it can only transfer a benefit or right to a third party who intends to act in a spirit of mutual trust and co-operation.  The Contractor's right to freely assign is unlikely to remain unamended by most Clients.
• Additional compensation events –The parties can now provide for additional compensation events in the Contract Data Part 1.  A new compensation event has also been added to Core Clause 60 allowing the Contractor to be compensated for the cost of preparing a quotation, if the Project Manager has requested one for a proposed instruction and then does not accept it.
• Programme – New provisions which provide "treated acceptance" of the Contractor's programme have been introduced at Core Clause 31.3 in situations where the Project Manager does not respond to a programme issued by the Contractor for acceptance, or to a reminder.  According to the NEC, this is to "unlock the impasse which otherwise prevails".
• Termination – The Client's right under NEC3 to terminate for any reason has been removed from Core Clause 90.2.  It is now available as an optional provision, under X11.

The ethos behind NEC4 – to modernise, streamline, reflect market practice, promote collaboration and avoid excessive use of Z clauses – is to be welcomed.  However, careful review is required, particularly in areas such as design responsibility, copyright, BIM and assignment rights.  For many Clients the new provisions are unlikely to go far enough and Z-clauses will undoubtedly remain numerous.  

While NEC users begin to familiarise themselves with the new contracts, it is worth noting that the NEC intend to continue to support users of NEC3 and have assured users that such support will continue indefinitely. Those new to NEC contracts are being encouraged to start with NEC4.