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NEC3 – Collaborate or Else…

Steven
June 29, 2016

Collaborate working, when all parties to a construction contract work together to achieve the same aim, seems like utopia.

All too often and notwithstanding initial good intentions, many construction projects degenerate into difference and dispute.

It would seem that collaborative working is a state of mind; if the parties want to work together they will do so, regardless of the terms of the contract. There is plenty of evidence to suggest that working together reduces overall costs rather than increasing them. The issue is that one party’s costs may reduce at the expense of the other; that other party may then have no commercial alternative but to act exclusively in its own best interest.

The NEC3 addresses this by providing, as a contractual obligation, that the parties will work collaboratively, and providing real and costly sanctions against that party who refuses to do so.

Some of those obligations, and consequences of a breach, are set out below:

Firstly, clause 10 says that everyone must act as stated in the contract and in a spirit of mutual trust and cooperation.

There appears to be two separate obligations; that the parties stated shall:

  • act as stated in this contract; and
  • act in the spirit of mutual trust and cooperation.

The first part is straightforward and the remedy for most breaches of that obligation are contained within the contract, for example the failure to reply to a communication.

The second part is more problematic from a legal point of view. There is no concept of good faith in a legal system derived from English common law, however, this clause imports such an obligation into the NEC3.

Clearly, it is an obligation that can be breached, but there is no remedy for the breach contained within the contract; accordingly, the innocent party’s remedy lies outside the contract, i.e. common law damages (or possibly an equitable remedy in appropriate circumstances).

The problem for the innocent party is proving that the behaviour of one of the parties is, whilst not a breach of the other parts of the contract, a breach of the spirit of mutual trust and cooperation. The innocent party would then need to assess and prove a monetary compensation.

Other obligations under the contract include:

Early Warning.

It is the obligation of both the Project Manager and the Contractor to give the other early warning of any risk they are aware of which may affect the time or the prices.

The Project Manager must enter the contents of an early warning notice on to the Risk Register and either the Project Manager or the Contract can require the other to attend a Risk Reduction Meeting to discuss the Risk Register.

If the Project Manager fails to give early warning to the Contractor, the time or prices may be higher than they otherwise would be, a sanction against the Employer.

However, if the Contractor fails to notify the Project Manager, the sanctions are expressly stated in the Contract, i.e.:

Under Main Options A, B, C, D and E, a compensation event is valued as if the Contractor gave the early warning notice (subject to procedural requirements). This means that any Defined Costs or affect on Planned Completion that only arises due to the Contractor not giving early warning, is discounted in the assessment of the compensation event.
Under Main Options C, D & E, any cost incurred which is as a consequence of the failure by the Contractor to give an early warning is a ‘disallowed cost’.

Programme

The Contractor must submit his programme for acceptance at specific times during the project. If he fails to submit his first programme, 25% can be retained from his payment until he does.

For a failure to submit any programme:

Some compensation events are not available to the contractor; and
The contractor loses his right to value any time impact compensation events.

Compensation events

If the Contractor fails to notify the Project Manager of a compensation event within 8 weeks of him becoming aware of the event, he loses his right to claim any additional time or money (unless it is an event which the Project Manager should have notified to the Contractor).

If the Project Manager fails to reply to a notifcation of an event by the Contractor within 1 week, the Contractor may notify the Project Manager of that failure. If the failure continues for a further 2 weeks after the reminder, it is deemed that the Project Manager has accepted that the event notified is a compensation event and an instruction issued to provide a quotation.

If the Project Manager fails to reply to a quotation or to assess a quotation within the allowed time, the Contractor may notify the Project Manager of that failure. If the failure continues for a further 2 weeks, the Contractor’s quotation is treated as being accepted.

There is no express sanction for a situation in which both the Project Manager and the Contractor entirly fail to notify an event which the Project Manager should have notified save that only notified events are compensation events and that no event can be notified beyond the Defects Date.

There are others, and I will add to this article over the coming weeks.

Written by Steven Evans who is a construction contract and commercial expert with particular specialism in NEC3, and is an NEC accredited tutor.

This article is for general information purposes only and should not be relied upon in any specific situation without appropriate legal advice. If you require that advice or wish to discuss any of the issues raised in this article, please contact us.

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