Built Intelligence

NEC4 ECC and COVID-19

NEC4 ECC and COVID-19

Introduction

The world is currently facing an unprecedented crisis with significant detrimental effect on both health and the economy. Governments worldwide are taking draconian actions not before seen in peacetime, with some countries in total lockdown.

The construction industry will not escape this and, however, this is resolved, taking the correct action now will ensure you fully protect your own position under the contract.

This paper examines the risk, liabilities and obligations under the NEC4 ECC contract in connections with matters and events arising from the COVID-19 virus. Generally, the principals in this paper also apply to the NEC4 ESC Subcontract and the equivalent NEC3 contracts, but note, there are minor differences which are not necessarily highlighted.

 A word of warning. Many contracts have bespoke amendments; in NEC contracts they maybe by ‘Z clauses’, other amendments to the core, main Option or secondary Option clauses, or a combination of both. This paper refers only to the unamended contract. If your contract is amended, it is recommended you take expert advice. For that expert advice, the author’s contact details are at the end of this paper.

Finally, this paper is supported by a webinar presented by the author in conjunction with Built Intelligence and which is freely available here

Collaboration

NEC4 is, fundamentally, a collaborative contract. There is unlikely to be another time where close collaboration by the Parties is needed more than now. Whilst this paper explores the Parties’ contractual rights, responsibilities and obligations, it is the author’s recommendation that the Parties take particular notice of clause 10.2 and act in a spirit of mutual trust and cooperation. By doing so will, no doubt, lessen the pain over the coming months.

Force Majeure

Many contracts have a ‘force majeure’ type clause. French for ‘superior force’ and intended to clearly define liability for unforeseen and unforeseeable events for which neither party is liable, those clauses tend to make provision for extension of time, variations, loss and expense and termination.

Different contracts approach this is different ways, some using the term ‘force majeure’ others not. ‘Force majeure’ type clauses in standard contracts are often amended in in a way to place greater risk on the Contractor. Amendments are also common to narrow the definition of ‘force majeure’.

Instead of ‘force majeure’, NEC4 uses the term ‘prevention’ at clause 19 with a corresponding compensation event at clause 60.1(19). However, this is not the only clause that a Party may rely upon when considering the impact of COVID-19.

The starting point is whether the Contractor or the Project Manager is aware of a matter that requires notification of an early warning; and/or whether an event has happened or is likely to happen and which is one of the compensation events listed at clause 60.1.

Early Warning

Clause 15.1 requires the Contractor and the Project Manager to notify the other of any matter which could increase the Prices, delay Completion, delay meeting a Key Date or impair the performance of the works in use. This is an obligation on both.

Careful consideration should be given to which ‘matter’ is being notified. Is the matter, for example:

  • A direct effect of COVID-19,
  • A direct effect of a dictate from the government,
  • A delay to the delivery of Plant and Materials from an overseas supplier,
  • Difficulty in obtaining required People?

It may be necessary to issue more than one notice if more than one matter exists. The notice should also be specific, a general ‘the virus is delaying the works’ does not have much utility.

When deciding how specific to be, the Contractor and the Project Manager should consider how the matter might be reduced or resolved. A delay to Materials procured from overseas may be dealt with differently to a difficult in obtaining local labour, so there is merit in notifying those separately as the action taken would likely be different. 

A Contractor should be aware that notifications would be required separately for each Subcontractor and actions to avoid or reduce the effect of the notified matter would likely be different in each case.

The notification does not change liability, however, a failure to do so has consequences beyond the missing out on the advantages gained in seeking solutions to the notified matter in a collaborative and co-operative environment. A failure to issue an early warning notice may result in a compromised compensation event assessment (clause 63.7) and, under main Options C, D, E and F, a cost incurred because an early warning was not given will be disallowed (clause 11.2(26)).

Clause 15.1 also gives the Contractor and the Project Manager the right (although not the obligation) to notify the other of any matter which could increase the Contractor’s total cost, irrespective of the effect on the total of the Prices.

Finally, if the matter has already been notified as a compensation event, then it does not need to be notified as an early warning (clause 15.1). However, as the consequences of COVID-19 and the actions of the government are evolving, there is obvious merit to the Project Manager the Contractor continuing a dialogue.

Project Manager instruction and compensation events

What is the event and is the event a compensation event?

One can imagine a number of possible events arising from COVID-19, including an instruction to stop the works and an instruction stating constraints on how the Contractor Provides the Works.

The Project Manager has the right to issue those instructions irrespective of the existence of a force majeure or prevention event.

Clause 14.3 empowers the Project Manager to change the Scope (which would include any constraints on the Contractor) and this is a compensation event under clause 60.1(1); clause 34.1 empowers the Project Manager to stop the works and this is a compensation event under 60.1(4).

It is worth repeating that any such instruction issued by the Project Manager will be a compensation event whatever the reason for the instruction.

Both clause 14.3 and 34.1 are drafted to give the Project Manager the right to issue instructions rather than the obligation to do so; both use the word ‘may’. The only obligation is at the second part of clause 34.1 which, if the Project Manager issues an instruction to stop or not start any works, the Project Manager subsequently gives an instruction either to restart or start the work or remove the work from the Scope. The latter instruction would be a compensation event under 60.1(1).

However, if an event occurs which satisfies clause 19.1, then the Project Manager is obliged to issue an instruction.

There is much debate on this; but, in the opinion of the author, as clause 19.1 does not use the word ‘may’, then it creates an obligation rather than a right. This is consistent with the drafting of other parts of the contract.

Take early warning at clause 15.1; for matters that are in the list of four bullet points, the clause says the Contractor and the Project Manager give an early warning by notifying the other. For matters that increase the Contractor’s total cost, the clause says the Contractor and the Project Manager may give an early warning by notifying the other. The former creates an obligation, i.e. the Contractor and the Project Manager shall give an early warning (the ‘shall’ coming from clause 10.1), the latter just giving a right to do so if the Contractor and the Project Manager wish to.

For that reason, the absence of ‘may’ in 19.1 strongly suggests that the Project Manager shall issue an instruction stating how the event is to be dealt with if the event is a ‘prevention’ event satisfying the requirements.

Those requirements are twofold, and both must be satisfied. Firstly, that the event must either stop the Contractor completion the whole of the works or stop the Contractor completing the whole of the works by the date for planned Completion shown on the Accepted Programme.

The NEC User Guide, suggests that ‘stop’ means ‘impossible’, i.e. that it is not simply difficult to complete the whole of the works, but must be impossible, whatever resources are utilised. This may be stretching the definition of ‘stop’ a little but suffice to say whether an event satisfies this requirement will turn on the particular facts.

Secondly, in addition to ‘impossibility’, the event must be judged to have such a small chance of occurring that it would have been unreasonable to have allowed for it.

A couple of points arise from that:

  • The Contract Date is defined by the contract as the date when the contract came into existence. If the contract is ‘simple’, the date when it came into existence may not be easy to identify and maybe a subject of disagreement,
  • For contracts that came into existence in February 2020, the likelihood of the event occurring in the manner that it has, would be different as each day went by.

Accordingly, whether the event satisfies clause 19.1 will turn on the particular facts. Suffice to say that for contracts that came into existence before January 2020, the current events would likely satisfy clause 19.1. For contracts that come into existence now, the current events would likely not satisfy clause 19.1.

On the assumption that the event satisfies the conditions in clause 19.1, the Project Manager is obliged to give an instruction to the Contractor stating how the event is to be dealt with.

That instruction could be, for example,

  • An instruction to introduce a constraint on how the Contractor Provides the Works and this would be a compensation event under clause 60.1(1),
  • An instruction to stop all or part of the works and this would be a compensation event under clause 60.1(4),
  • An instruction that the Contractor deal with the impact of COVID-19 in whatever manner it sees fit.

That last bullet point is not a compensation event under 60.1(1) or 60.1(4). However, it would probably be a compensation event under 60.1(19).

Clause 60.1(19) mirrors clause 19.1. Accordingly, if an event satisfies clause 19.1 then the event is a compensation event under clause 60.1(19) provided it is not one of the other compensation events. It will be a compensation event irrespective of any instruction by the Project Manager.

However, a point of importance. A compensation event under clause 60.1(1) and 60.1(4) is notifiable by the Project Manager under clause 61.1. A compensation event under clause 60.1(19) is notifiable by the Contractor under clause 61.3 and is subject to the 8-week time-bar set out therein.

Accordingly, if the Contractor fails to notify, then it will lose its right to have the Prices, Completion Date and Key Dates changed.

Other compensation events

Other compensation events may apply, such as:

  • 1(2) – the Client does not allow access to and use of each part of the Site by the later of the access date and the date for access shown on the Accepted Programme
  • 1(3) – the Client does not provide something which it is to provide by the date shown on the Accepted Programme
  • 1(5) – the Client or others do not work within the times shown on the Accepted Programme, do not work within the conditions stated in the Scope of carry out work on the Site that is not stated in the Scope
  • 1(21) – additional compensation event stated in the Contract Data part 1.

Whether that applies will turn on the facts. It should be noted that each are notifiable by the Contractor under clause 61.3 and is subject to the 8-week time-bar set out therein. 

Accordingly, if the Contractor fails to notify, then it will lose its right to have the Prices, Completion Date and Key Dates changed.

Secondary Option X2

This secondary Option makes a change in the law of the country in which the Site is located a compensation event if it occurs after the Contract Date.

As mentioned above, the Contract Date is defined by the contract as the date when the contract came into existence. If the contract is ‘simple’, the date when it came into existence may not be easy to identify and maybe a subject of disagreement.

Careful consideration of any government dictates needs to be undertaken to ascertain if any are the result of the application of existing law or the result of new legislation and, if so, whether that new legislation has a direct effect on the Prices and/or the Completion Date.

A compensation event under clause X2 is notifiable by the Contractor under clause 61.3 and is subject to the 8-week time-bar set out therein.

Accordingly, if the Contractor fails to notify, then it will lose its right to have the Prices, Completion Date and Key Dates changed.

Assessment of compensation events

Compensation event are assessed based on:

  • The change in the Prices is based on actual/forecast Defined Cost plus the Fee,
  • The change in Completion Date is based on the delay to planned Completion

With an allowance in each of the above for risk.

This paper is not the place to go into detail of the assessment, but a few points to note:

Clause 61.6 requires the Project Manager to state assumptions if the effect of the event is too uncertain. In that case, the assessment is based on those assumptions and, if those assumptions are wrong, it is a further compensation event under 60.1(17).

At the time of writing this paper, it is probably the case that the effects of the event are too uncertain and so the Project Manager must state assumptions. This is likely to change over time as the effects become more certain.

If the Project Manager and the Contractor decide that they want more time to establish the effects of the event before making the assessment, then they can agree to extend the time by which a quote must be issued using clause 62.5. That being said, it is always recommended to maintain the dynamism intended by the contract if possible.

When making an assessment of the effect of the event on Defined Cost, note that, for example, the component of ‘People’ costs which is recoverable depends on which main Option is used.

For main Options A and B, using the Short Schedule of Cost Components, the component of cost which is included in the amount due to the Contractor is limited to the total time…..spent within the Working Area. This means that people working from home, if that is outside the Working Area, would not be included unless the Working Area was changed.

The Working Area can be added to by a proposal from the Contractor; however, one should note that a reason for not accepting is that the proposed area is used for work not in the contract. This would suggest that if a person’s home is also used for other work, then it could not be part of the Working Area.

For main Options C, D and E, using the Schedule of Cost Components, the component of cost which is included in the amount due to the Contractor is wider, being limited instead to the time worked on the contract.

It is important to carefully consider all of the components to ascertain which will be included in the amount due to the Contractor. The usual proviso that the amounts must be reasonably incurred and used to Provide the Works applies.

Termination

It may be necessary to terminate the Contractor’s obligation to Provide the Works as a consequence of the effects of COVID-19. This could be for a variety of reasons including that the project is no longer financially viable.

Termination can arise either from:

  • An instruction of the Project Manager to stop or not to start substantial work and an instruction to restart or remove the work is not given within 13 weeks. If the reason for the instruction is neither Party’s fault, then either Party may terminate.
  • A prevention event which satisfies the conditions at clause 19.1 which delays the Completion of the whole of the works by more than 13 weeks in which case the Client may terminate.

The termination procedure in the contract must be followed strictly.

In either case, the amount due to the Contractor after termination is the same, being the sum of the amounts due A1 plus A2.

If the contract includes secondary Option X11, the Client is able to terminate at any time and for any reason. The consequence of doing so is that the amount due to the Contractor also includes A4, being the Fee percentage applied to the work not yet done. It should be noted that if X11 is incorporated, the amount due is often amended.

Current procurement

As mentioned above, clause 19.1 is unlikely to be satisfied for any contracts that come into existence now and for the foreseeable future. This would mean the Contractor would be liable for the ongoing effects of COVID-19. For that reason, it is of vital importance that the proposed parties to a contract negotiate and agree on current an ongoing liability and include those agreements clearly in amendments to the contract. The author is able to advise on this if necessary.

Summary and Recommendations

  • The Project Manager and the Contractor are obliged to issue an early warning notice,
  • The Project Manager has the power to issue instructions to change the Scope and stop the works; these are compensation events,
  • If an event occurs which satisfies 19.1, the Project Manager is obliged to issue instructions on how to deal with the event,
  • Those instructions may include changing the Scope and stopping the works which would be compensation events notifiable by the Contractor,
  • Any other instructions, or if no instructions are given, if an event satisfies 19.1 then it is a compensation event under 60.1(19), notifiable by the Contractor but caught by the time bar,
  • Other compensation events may apply,
  • Note, when assessing the effect of the compensation event, the amount due to the Contractor is limited to the components of costs listed in the relevant schedule of cost components,
  • Depending on the circumstances, either Party may terminate the Contractor’s obligation to Provide the Works.

It is vitally important that:

  • The Parties collaborate to ensure the best outcome with the minimum cost and disruption,
  • The Project Manager and the Contractor comply with the contract strictly and issue the relevant communications at the correct time to ensure effective collaboration and correct allocation of risk and entitlements

Author

Steven C Evans BSc(Hons) LLB(Hons) FCIArb FAMINZ(Arb) FFAVE(Master) FRICS FCInstCES FCIOB FICE PRI

For more information contact Steven at:

Steven C Evans Limited (UK and Europe)

sce@stevencevans.com

CMC Asia Pacific Pty Limited (Australia and New Zealand)

steven.evans@cmcasiapacific.com

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