Hill International, Inc. Hill International (UK) Ltd
John P. PaolinHelen Walker
Vice President of Marketing and Corporate CommunicationsMarketing Manager
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Article by David Carrick for ICES Construction Law Journal
Risk in the NEC3 contract
There is no doubt that NEC is a world class contract and I do not intend that this article should suggest otherwise. The contract has now reached its third edition. Certainly for me the high water mark for drafting clarity was edition 2 but edition 3 introduced new concepts, most of which are improvements to the contract. However, in my opinion some of these lack the elegant simplicity of earlier versions. I am actively involved in advising parties in the use of NEC3 both at procurement and when disputes arise. The views expressed herein are based on that experience.
There can be no doubt that although NEC is increasingly used in many disciplines its main use is in civil engineering. Civil engineering is inherently a risky business. Contractors appreciate that and most are not totally risk averse. What they are opposed to is unquantifiable risk and risk uncertainty. Historically much of the success of NEC is down to clear and simple drafting. Subjectivity was reduced to a minimum and the inclusion of a project management system within the conditions was a novel feature at the time. The question ishas NEC 3 lost the clarity and simplicity of its younger brothers when dealing with risk? My tentative response is “yes” but much could be restored very easily.
First let’s look at the provisions in NEC 3 that deal with risk and then look at the problems that arise and how to deal with them.
Risk - contractual provisions
Risk allocation: This is dealt with at clause 80.1 where we find a predefined list of risks that remain with the Employer and, should these risks arise, then it becomes a compensation event dealt with at clause 60.1 (14). Clause 80.1 renders the Contractor liable for all other risks. Finally clause 80.1 at the last bullet point allows the Employer to accept further risks and these are listed in the Contract Data. Remember that – in the Contract Data. I will elaborate on this below but there is a misconceived idea that contractual responsibility for risk can be allocated by making entries in the risk register. If that is the intention, it does not work. In my opinion, the reference to “Additional Employer’s risks stated in the Contract Data” requires a clear Z Clause amendment to Clause 80.1 if a contractual allocation of risk is to be effective.
Risk management: NEC 3 introduces a risk management system including a Risk Register, early warnings, risk review meetings and provides a sanction against the Contractor if he fails to give an early warning. These are covered in clauses 11.2 (14), and 16 respectively. The sanction is that if a matter that ought to have been the subject of an early warning (but none was given) becomes a compensation event then that is evaluated “as if an early warning had been given”. That comes from clause 63.5.
Prevention: This is a new concept introduced at clause 19.1 and has an associated compensation event at clause 60.1 (19). The side heading “Prevention” is somewhat misleading. There are in fact two scenarios covered within the same provision. The first dealswithmattersthat prevent completion entirely and the second covers matters that prevent completion by the due date shown on the accepted programme. Both have to pass various tests, such as having such a small chance of occurring that it would have been unreasonable for the Contractor to have priced the risk and being a risk that neither Party can prevent.
Risk – the problems that are arising
Risk allocation: One persistent problem is one of confusion between risk allocation and risk management. These are meant to be standalone provisions but the wording of clause 80.1, final bullet point that allows additional risks to be adopted by the Employer by adding them into the Contract Data, blurs the distinction.
The problem is that, whilst there is only an entry available in Contract Data part one (the part completed by the Employer), for these additional Employer assumed risks there is an entry in Contract Data part two (the part completed by the Contractor) to add additional items into the Risk Register. I have frequently seen Employers build the most complex Risk Registers imaginable. The big danger is adding a column saying who bears the risk. That is wholly unnecessary because the allocation of risk is dealt with in clause 80.1. Contractors of both innocent and cunning varieties are attempting to pass risk to the Employer via the addition entries in the risk register contained in Contract Data part two.
Risk management: NEC 3 introduced a complete risk management system into the contract to complement the original project management system. Where the problem begins is with the definition of a Risk Register. Clause 11.2 (14) sets out the minimum contents of the Risk Register. These are a description of the risk and a description of the action to be taken to avoid or reduce the risk. Unfortunately, drafters of individual NEC 3 contracts don’t seem to be able to stop themselves adding a vast range of other information, regardless of whether it contradicts other contract provisions.
I have actually seen a Risk Register priced up at time of tender so the Employer could decide whether to accept the risk or not. There is nothing wrong with seeking alternative bids. However using the Risk Register to do this, especially where the ownership of the risk is also stated, invites uncertainty.
The second problem I often see stems from the wording of clause 63.5. “...assessed as if the Contractor had given an early warning...”. I am of the view that means that, if an early warning had been given and a risk reduction meeting had taken place, the value of the compensation event is assessed taking into account any mitigation that would have come from that meeting. However it has been argued that if no early warning has been given, one just pretends one has been given. This is a possible but unlikely interpretation.
Prevention: The drafters of NEC 3 are correct in describing a total inability to complete the Works as prevention. Where, in my opinion, they go too far in retaining risks for the Employer is when they provide a remedy for what amounts to delay. In other words, the second bullet point is just a step too far and what generally happens is that a savvy Employer deletes all of clause 19.1 and the attendant compensation event. That seems a shame because the first limb is a sensible provision, albeit with a somewhat objective criterion of being such a small chance of happening that it would be unreasonable for an experience contractor to allow for it.
How to solve the problems
Risk allocation: All it takes is to add the words “part one” at the end on the final bullet point so it now reads “Additional Employer’s risks stated in Contract Data part one”. To be absolutely clear one could add into the Risk Register entry in Contract Data part two “Adding additional risks into the Risk Register does not alter the allocation of risk contained in clause 80.1”.
Risk management: Be very careful what you include in the risk register and be sure you need to include the extra material. If you really must go beyond the minimum then check the extra doesn’t contradict the contract. Consider clarifying clause 63.5 either as a Z clause or as a pre-tender clarification.
Prevention: It is very easy to delete clauses 19 and 60.1 (19) entirely and that is quite commonplace. One could also amend them to allow only true prevention.
Please take this article as an Adjudicator’s view of where NEC is causing problems, with some suggestions as to how they can be prevented, rather than a condemnation of a generally well drafted contract.
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