BUILT ENVIRONMENT JOURNAL

Why NEC4 updates take a proactive stance

Opinion: Last October's amendments to the NEC4 suite of contracts have anticipated potential legal developments to encourage the construction industry to adopt new principles

Author:

  • Michael Hiscock

13 April 2021

Woman signing contract

The NEC4 contract suite was published in June 2017. It had evolved from the NEC3 suite to provide simplified processes, reduce the frequency of disputes and make contract provisions simpler to understand.

The first set of amendments to the NEC4 suite were published in January 2019, and a second set followed in October 2020 in the light of feedback from users and industry experts. The amendments not only keep the contract suite up to date, but also make some positive decisions to encourage the industry to adopt certain principles.

Application of delay damages

The first such principle concerns when delay damages may be claimed. The contract authors have chosen not to wait for the Supreme Court to rule on this matter in Triple Point Technology Inc v PTT Public Company Ltd UKSC 2019/0074. Instead, contracts that contain option X7 to claim delay damages have now been amended to clarify that the ability to make such a claim will cease at contract termination.

The client is still able to use a pay-less notice against the sum due, setting out the basis for deducting any delay damages as a matter of general law. But they should be aware that the nature of the delay claim is different, depending on when the delay occurred.

Fixed delay damages apply before termination of the contract. After that date, any further delay costs will be part of general damages, which must be proven by the client as resulting from the termination.

This therefore establishes that the grounds for termination and the contractual and general right to claim loss and damage are all subject to the normal legal tests. In the former case the grounds must be verified, and in the latter more detailed evidence must be provided for the connection between the breach and the losses claimed.

The general practice in the industry – depending on the exact words of the contract – had previously been to accept that delay damages could be levied until the date of termination and general damages would be available if proven thereafter.

However, in considering Triple Point, the Court of Appeal has already expressed concern about this; both in terms of the general division of liquidated and unliquidated damages before and after termination, and also where the first contractor, by virtue of termination, is unable to complete the project.

In the former instance, the Court of Appeal would prefer an overall assessment of the client's total loss, applying the normal rules for assessing damages for breach of contract mentioned above. The latter concern arises because a contractor whose engagement has been terminated cannot influence the completion date, so its post-termination exposure to delay damages is effectively punitive.

While we await the Supreme Court's judgment on Triple Point, the NEC4 authors have favoured the Court of Appeal's earlier decision in the same case. In its deliberations, that court considered a House of Lords decision from more than 100 years ago, British Glanzstoff Manufacturing Co Ltd v General Accident, Fire and Life Assurance Co Ltd [1913] SC(HL)01, which also stated that liquidated damages for delay can only be claimed where the original contractor completes the works.

The Court of Appeal judgment was based on the analysis of the exact contract wording in Triple Point. It applied delay damages up to the date of termination, but also commented that the logic applied by the House of Lords in Glanzstoff carried weight. If validated by the Supreme Court, this would mean that the entire delay damages contract mechanism would fall away in a termination scenario, and damages for any delay in the whole job would have to be proven.

The NEC authors have decided that the distinction between levying liquidated damages before termination and general damages afterwards is their preferred contractual route. Unless rendered illegal by the Supreme Court's forthcoming decision – which would require the NEC authors to issue further amendments – then the general rules of contract interpretation and the freedom of commercial parties to adopt an agreed contract would prevail.

Project bank accounts

The NEC4 amendments also tackle project bank accounts. These are an increasingly common feature of the industry, particularly in public-sector contracts. They are designed to implement fair payment practices by protecting funds against insolvency, and have therefore attracted attention in the private sector too.

This is particularly relevant in relation to the recent Corporate Insolvency and Governance Act 2020, passed in response to COVID-19. The legislation prevents suppliers terminating a contract as a result of clients becoming insolvent, and it therefore enables ringfenced project money to be paid along the contractual supply chain. If a party is prevented from terminating a contract as a result of clients becoming insolvent, then protection of funds by means of a project bank account in this way becomes increasingly important.

While the NEC contracts already contained an option for a project bank account, the latest amendments address the practicalities of this. There is now an option for the client to decide how to hold the account, and therefore how much day-to-day involvement it wishes to take, together with provision for a payment schedule prepared in advance by the contractor and agreed with the client.

This would include setting out named suppliers, and there would be an obligation on the contractor to update the project bank account tracker, listing all payments for the sake of clarity and transparency.

All these amendments encourage public-sector bodies to comply with their obligations under the Public Contracts Regulations 2015 to maintain fair payment practices.

Although the amendments give a client the option to allow the contractor to hold the project bank account, the NEC's recommended best practice is that the account is held jointly by both parties, to ensure one can access it in the unfortunate event of the other's insolvency.

"Project bank accounts are an increasingly common feature of the industry, particularly in public-sector contracts"

Proactive provision on payment

The recent case of Rochford Construction v Kilhan Construction [2020] EWHC 941 (TCC) has prompted concern that NEC4 contracts linking the final date for payment to the submission of an invoice from the payee will not comply with the rules for construction contracts set out in the Housing Grants, Construction and Regeneration Act 1996.

It is not possible to contract out of the 1996 Act by agreement, so it requires that non-compliant aspects of any contract will be replaced by relevant terms from the associated Scheme for Construction Contracts.

While the NEC4 amendments take Rochford into account, the court's conclusions on this point were not integral to its decision, and – as with the appeal decision in Triple Point mentioned above – those conclusions may also be subject to legal challenge in the future.

However, the NEC4 authors have decided to adopt a proactive stance and amend the contract to anticipate the future direction of the law in this area. As a result, the contract states that the final date for payment is now a fixed period of time from the due date, and no longer calculated by reference to the date of receipt of an invoice. Meanwhile, the due date is now linked to the date of receipt of the invoice, or 14 days from the assessment date.

These two limbs provide the ability to calculate a definite due date for payment by reference to either the contractor's action of submitting an invoice, or the project manager's action of assessing the amount due on an exact date between each assessment interval stipulated in the contract. This provides the certainty required by the Housing Grants, Construction and Regeneration Act 1996 – as amended – in order to avoid that Act imposing the Scheme for Construction Contracts.

Parties should note that these amendments to payment dates do not change the final calculation for payment deadlines; but they will be relevant in terms of compliance with obligations to submit applications, calculating deadlines for serving payment notices, and potential disputes that arise from the specific requirements of the 1996 Act.

This means that timely notices setting out the basis of the sums due and payable will be necessary, and these must be correct in content, form and substance. Timing therefore becomes critical, and procedures on any particular project should be analysed and modified if necessary to reflect the latest legal position, which has been mirrored in the NEC4 authors' amendments.

Further amendments

Although the NEC4 authors must be commended for their prompt analysis of the law as it currently stands, there is still a potential need for further amendments depending on the future direction of the law in the areas of fair payment, delay damages and payment mechanisms.

However, regular contract amendments that reverse previously stated positions may deter parties from using NEC4 despite its advantages, which include the collateral warranty option, the final account clauses, the level of detail on BIM, clarity on deemed acceptance of the contractor’s programme, and the avoidance of uninsurable fitness for purpose liability. The fact remains that – used properly – NEC4 can benefit a project.

michael.hiscock@wrighthassall.co.uk

Related competencies include: Contract administration, Contract practice

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