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NEC3 – Changes to the Engineering and Construction Contract, the Final

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NEC3 – Changes to the Engineering and Construction Contract, the Final Instalment
This month the review of the changes from the second to third editions of the ECC moves on to consider Core
Clauses 7, 8 and 9, the new Options W1 and W2 and finally the changes to the Secondary Options. This will be
the final instalment of the series of articles covering these changes from the 2nd to 3rd editions of the ECC
which I hope readers have found informative. Let’s get down to business.

Within Core Clause 7 there is only one change to note, where at clauses 70.1 and 70.2 the reference to
‘Equipment’ has been removed in respect of the passing of title from the Contractor to the Employer. It would
appear that this change has been made as NEC never intended that the title in the Contractor’s excavators etc
would pass to the Employer.

Moving on to Core Clause 8, the first of two changes is found at clause 84.2 where the period that the insurance
cover is required for has been amended to be from the starting date until the defects date or when a termination
certificate has been issued. This change corrects the previous anomaly whereby in the event that a termination
certificate was issued the requirement for insurance cover did not automatically end. The second change is at
clause 85.1 where the previous requirement for the Contractor to submit insurance polices and certificates has
been amended to the submission of certificates only. Under the 3rd edition these certificates must be signed by
the Contractor’s insurer or insurance broker. The requirement at clause 87 for the Employer to submit policies
and certificates has not been changed.

The first change to Core Clause 9 to note is in its title which has been changed from ‘Disputes and termination’
to ‘Termination’. The ‘Disputes’ provisions have been moved to options W1 and W2, which, together with part
of what constituted Secondary Option Y(UK)2 under the 2nd edition, now form the dispute resolution options.
These are commented on later in this article. The termination clauses have been renumbered 90 to 93 (from 94
to 97) and these provisions whilst maintaining the 2nd edition format and content have been the subject of some
minor revisions. Clarification has been added to Clause 90.1 (was 94.1) to confirm that the matter being
terminated is the Contractor’s obligation to Provide the Works (as defined at clause 11.2(13)). Reason for
Termination R17 (war or radioactive contamination) in the 2nd edition has been deleted, resulting in R18 to
R21 being renumbered as R17 to R20. Finally, a new reason for termination has been added, numbered R21, in
respect of the new ‘prevention’ principle as provided for at Clause 19 and which is also catered for by the new
compensation event at clause 60.1(19). Readers are reminded that this equates to the force majeure provisions
found in other standard forms of contract.

The 3rd edition now provides two options in respect of Dispute Resolution, known as Option W1 and Option
W2. The Schedule of Options, found at page 1 of the ‘black book’, states that one of these dispute resolutions
options must be selected to complete the chosen main Option. As I said in an earlier article, in the event that the
parties did not incorporate one of these Options into the contract then in the UK adjudication in accordance
with the Scheme for Construction Contracts would be implied by statute for any contract which constituted a
‘construction contract’ in accordance with the provisions of Part II of the Housing Grants, Construction and

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Regeneration Act 1996 and/or the parties would have the option to refer any dispute to the courts. Similarly
elsewhere in the world it is not to my knowledge possible to escape the jurisdiction of the courts. So the failure
to select one of these options will not prevent the parties from referring disputes to a third party of some sort.
That said it is generally better to use contractual options where available.

Option W1 is for use with any contract to which the UK’s Construction Act does not apply, and as you would
rightly assume Option W2 is for use where that Act does apply to the contract in question. Both Options, in
common with the 2nd edition, include provisions for the reference of a dispute to adjudication and then to the
tribunal, as identified in Contract Data Part One. A dispute must have been referred to adjudication before it
can be referred to the tribunal. Such reference to the tribunal must be made within four weeks of the adjudicator
having decided the dispute; otherwise the parties lose their right to make such a reference. In other words unless
a matter is referred too the tribunal within four weeks of the adjudicator’s decision, such a decision will become
final and binding on the parties. Users should be aware of this extremely tight timescale.

Within these dispute resolution provisions the major change to note is that the provisions contained within the
second edition’s Secondary Option Y(UK)2 which involved a procedure to create something called a ‘matter of
dissatisfaction’ before a reference to adjudication could be made (for contracts falling under the provisions of
the Construction Act) have been dropped. This is because those provisions made Secondary Option Y(UK)2
non-compliant with the requirements of the Construction Act that requires that parties have the option to refer a
dispute to adjudication at any time. Option W2 complies with this statutory requirement. The adjudication
provisions within Option W2 comply with the requirements of section 108 of the Construction Act and in
addition at clause W2.3(3) allow a matter disputed under a subcontract to be referred to the main contract
adjudicator at the same time providing the subcontractor agrees to such a reference. The Adjudicator is then
required to decide both disputes. This provision should facilitate cost savings in respect of fees in such
circumstances.

As you may expect there have also been some changes in the Secondary Options. The most noticeable change
is the change is designation from being referred to as Secondary Options G to Z to now being called Secondary
Options X1 to X20. I described this change and provided a list of the Secondary Options in the third edition,
cross referenced to the second edition in the first article in this series in the September 2005 issue of Civil
Engineering Surveyor. Using the third edition numbering I now examine the changes within the Secondary
Options themselves.

In Secondary Option X7: Delay Damages (formerly Secondary Option R), a new provision has been added at
clause X7.3 that provides for a reduction in the delay damages in the event that the Employer takes over (in
accordance with clause 35) a part of the works before Completion. The Project Manager is required to assess
the benefit to the Employer of taking over the part of the works as a proportion of the benefit of taking over the
whole of the works not previously taken over and the damages are then reduced by the proportion. I must say
that having read the way the Guidance Notes describe such a calculation (using two widget factories being built
under the same contract as an example), I consider that the result is a mechanism that whilst required, and
probably necessary to maintain the integrity of the provisions in the event of partial take over, it is highly
subjective and in my view likely to cause disputes. The method adopted in other contracts where the reduction
is made by reference to the value of the works taken over as compared to the contract value is far more
objective and easy to ascertain thereby avoiding the kind of problems that one can foresee with this new clause.

Secondary Option X18: Limitation of liability, is a new Secondary Option. The Guidance Notes indicate that
this secondary option provides provisions that are particularly relevant in the process plant sector, in design and
construct contracts and that it may be of particular relevance for international contracts. Users are advised to
take appropriate legal advice relevant to the law of the contract when completing this option if it is selected.

At clause X18.1 the Contractor’s liability for the Employer’s indirect or consequential loss is limited to the
amount stated in the Contract Data. The Guidance Notes do not give any indication what such losses may
actually be. It is possible that this provision could conflict with Delay Damages (Secondary Option X7) and
Low Performance Damages (Secondary Option X17) should either or both apply and depending on the law of
the contract.

Clause X18.2 provides for the ability to limit the Contractor’s liability for damage to the Employer’s property,
such as adjacent buildings. This liability should be set no higher than the cover provided by the Contractor’s

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insurances. At Clause X18.3, the provision previously included at clause 21.5 of the 2nd edition in respect of a
limit of the Contractor’s liability for defects due to his design is included.

Clause X18.4 provides an overall limit of liability for the Contractor. If this limit is not equal to or higher than
the total of the three liabilities at clause X18.1 to X18.3, then in the Employer’s ability to recover the full
liability under all three heads would be restricted. This overall liability is subject to the excluded matters
identified within clause X18.4. Finally, at Clause X18.5 the Contractor is not liable for any matter unless it has
been notified to the Contractor before the end of the liability date, as stated in the Contract Data.

The second new Secondary Option is at X20: Key Performance Indicators (which is not for use with Option
X12: Partnering, which includes its own such provisions). The provisions in this clause act to provide a
measure of the Contractor’s performance against stated benchmarks and to provide incentives to achieve or
exceed such targets. The Contractor is required to provide regular reports of his performance to the Project
Manager and where it appears that he will not achieve the target to provide his proposals for improving
performance. In addition the Employer is allowed to introduce new KPI’s into the schedule but he cannot delete
or reduce any payment from the schedule. Whilst there are no express provisions allowing the Employer to
increase the payment in respect of a target in order to add additional incentive, there seems to be no restriction
preventing such an increase.

Secondary Option Y(UK)2 now includes payment provisions, at clauses Y2.2 and Y2.3, which act to bring
Core Clause 5 in line with the requirements of the Construction Act in the UK. The Guidance Notes state that it
is used ‘to supplement’ the core clause but strangely the provisions do not omit the conflicting periods at
clauses 51.1 and 51.2. This could cause a problem which would, in any event be resolved by the statutory
implication of terms by the Act.

Secondary Option Y(UK)3 has been amended so that instead of acting to exclude the rights of third parties, as
the second edition, it now provides that third parties only have rights to enforce a term of the contract if both
the term and the third party are stated in the Contract Data. Therefore by not naming any third parties or terms
all such rights are excluded.

That completes my review of the changes to the Engineering and Construction Contract within the overall
NEC3 family of contracts. I am in the process of writing an article about the Term Service and Framework
Contracts for the next edition of the Institutions annual Construction Law Review and with the editor’s
permission will return to review Subcontracting under the NEC3 family and the Professional Services Contract,
Short Contract, Adjudicator’s Contract and Procurement and Contract Strategies Guide in the not to distant
future.

Author: Michael Rowlinson

Date: June 2006

Contact No.: 01295 275975

This article was published in the June edition of "Civil Engineering Surveyor".

Michael Rowlinson

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