In 2016, JCT introduced its latest suite of contracts to the industry. In 2017, NEC and FIDIC followed suit, with NEC publishing its NEC4 suite of contracts and FIDIC publishing its 2017 editions of the Yellow, Red and Silver Books. In this feature, we take a look at the key changes that users of these international forms need to be aware of.

NEC4 - KEY CHANGES

On the 22 June 2017, the UK Institute of Civil Engineers released its NEC4 suite of contracts – the most substantial update since NEC3 was published in 2013. The new suite of contracts was released to "build on the success of NEC3", with the objective of "evolution not revolution". The NEC4 suite involved an update to all of the existing NEC3 contracts, as well as the release of the following additional contracts:

  • a Design, Build and Operate Contract;
  • an Alliance Contract (in consultation form only); and
  • new forms of subcontract.

The rationale behind the changes introduced by NEC4 included NEC's desire to minimise differences between the forms, to reduce users' over-reliance on z-clauses, to increase clarity within the forms, to bring the forms more in line with public sector principles and to take on board industry feedback. Many of the changes in the NEC4 suite are minor, but some are significant, presenting new risks and opportunities for users. Below, we outline some of the key chances to the Engineering and Construction Contract (ECC) that users need to be alive to.

Scope:

  • The term Works Information is no longer used, now replaced with the term Scope throughout the suite.
  • A new core clause allows the Contractor to propose Scope changes to the Project Manager for acceptance, with a value engineering percentage used (under Options A & B) to split the benefit between the parties.
  • A new secondary option also makes provision for the Contractor to propose Scope changes to reduce the whole of life cost of the asset, though the form is silent on liability issues if the proposed results are not achieved.

Time:

  • The term Risk Register is no longer used, now replaced with the term Early Warning Register, to distinguish it from the project risk register used for wider project management purposes.
  • Amendments have been made to the early warning regime requiring the Project Manager to prepare the first Early Warning Register within 1 week of commencement and set a date for the first Early Warning meeting within 2 weeks. The forms were previously silent on how this process was kick-started.
  • Employers should be aware that there are new deeming provisions in relation to any Contractor's programme submitted for acceptance. The programme will be deemed to be accepted by the Project Manager if he / she does not notify acceptance or non-acceptance within two weeks of it being submitted and such failure continues for a further week upon the Contractor giving notice. The rationale is to resolve the stalemate that otherwise arose under NEC3 and therefore reduce the scope for uncertainty as to the status of the Contractor's programme.

Payment:

  • Significant changes have been made to the payment provisions. Contractors should be aware that there is a new obligation to submit a payment application to the Project Manager before each assessment date. If the Contractor fails to do so, the amount due is deemed to be the lesser of the Project Manager's assessment or his previous assessment. Accordingly, in the absence of an application, Contractors can only receive a nil or negative assessment for that payment cycle.
  • A new deadline has been introduced for the Project Manager to make a final assessment of the amount due: four weeks after the Defects Certificate or 13 weeks after the termination certificate. The Project Manager's final assessment is conclusive unless the specified time limits for dispute resolution procedures are complied with, meaning any challenge by the Contractor outside these time limits will be time barred. However, if the Project Manager fails to issue the final assessment of the amount due by the deadline in the Contract, then the Contractor may issue its final assessment of the amount due. This will then become conclusive unless the specified time limits for the dispute resolution procedures are complied with. Under Options C, D and E, the Contractor can request that parts of the Defined Cost are assessed as the Works progress. This is done by the Contractor notifying the Project Manager when part of the Defined Cost is finalised. The Project Manager then has 13 weeks to review the part and if no assessment is issued by the Project Manager, the Contractor's assessment is deemed accepted.

Compensation:

  • There is a new compensation event if the Project Manager rejects a quotation for a proposed instruction, enabling the Contractor to seek payment for the costs of preparing the quotation. Additional compensation events may also be stated in the Contract Data. The rationale is to reduce the parties' need to incorporate them by way of z-clauses.
  • The concept of a 'dividing date' has been introduced to resolve the debate about the point at which the Contractor's compensation changes from actual Defined Cost to forecast Defined Cost (plus the Fee in both cases). Where the compensation event relates to a communication, the Dividing Date is the date of the relevant communication, in relation to all other compensation events, the Dividing Date is the date of notification of the relevant event.

Secondary Options:

  • Option X10 introduces a BIM clause. The option is designed to be 'protocol independent', allowing the Employer to specify its requirements in the Scope. However, in terms of ownership of the model and liability issues, these are dealt with in the option itself. Importantly, NEC4 takes a different approach in this regard than other industry protocols. The Employer takes ownership of the model as well as the Contractor's rights over the Project Information it provided for the model. The Contractor is only liable for a fault or error in its Project Information where it failed to provide the Project Information using the skill and care normally used by professionals providing information similar to the Project Information (i.e. if it is negligent).
  • Option X15 has been amended to provide for additional requirements in relation to design and build contracting. Importantly, the Contractor's design liability has been aligned with the standard expected from professionals (i.e. it must carry out its design using the skill and care normally used by professionals designing works similar to the Works). Previously, the Contractor's liability was just linked to a requirement to exercise reasonable skill and care. The onus is now also on the Employer to prove that the Contractor did not exercise this standard, as opposed to the Contractor proving that it did, which was the position under NEC3. The option now also includes additional provisions relating to licensing, retention of design documents and the requirement to take out professional indemnity insurance.

General changes to dispute resolution options (Now termed "Resolving and Avoiding Disputes")

As a general note it is important to remember that Options W1 and Option W3 are for contracts where the Housing Grants, Construction and Regeneration Act 1996 does not apply. Option W2 must be used for contracts where the 1996 Act does apply. There have been important changes to all of these dispute resolution options:

Option W1:

  • A new mandatory 'Step 1' has been introduced, requiring parties to refer a dispute to Senior Representatives prior to commencing adjudication.
  • This process has very short deadlines for compliance, failure to comply with which will result in the referring party being time barred. The deadlines differ depending on the particular dispute in question.
  • Once the dispute is referred to the Senior Representatives, the parties have one week to submit written statements of case and the Senior Representatives then have three weeks to negotiate and produce a written list of issues agreed and not agreed. The issues not agreed must be referred to adjudication within two weeks and if this deadline is missed the parties are time barred from disputing the issues further.

Option W2:

  • The Senior Representatives procedure from Option W1 has also been introduced to Option W2. However, it is purely consensual and does not fetter the parties' right to adjudicate at any time.

Option W3:

  • If this option is used, a standing Dispute Avoidance Board is put in place to resolve potential disputes. Reference to the Dispute Avoidance Board is a pre-condition to reference to the tribunal.

It is clear that a number of significant amendments have been made to the NEC4 suite. While NEC are keen to promote the new suite as one of "evolution not revolution", the amendments have resulted in a much longer form and appear to adopt regimes users may be used to seeing in other standard forms, such as JCT. In this way, the question arises as to whether NEC is moving away from the original ethos of the form and therefore whether its NEC4 suite does actually represent revolution over evolution?

FIDIC 2017 – KEY CHANGES

Almost 20 years after FIDIC released the 1999 editions of the Yellow Book (Plant and Design-Build), Red Book (Building and Engineering Works designed by the Employer) and Silver Book (EPC Turnkey), the industry has finally got its hands on the much anticipated second editions, which were released at the FIDIC International Contracts Users' Conference on 5 December 2017.

There was much hype about what might be expected, particularly following the widely criticised changes that were introduced by the consultation version of the Yellow Book (released at last year's Users' Conference). Those following developments closely will recall some not so friendly feedback from a number of international contractor bodies. Issue was taken with the higher degree of risk transfer from Employer to Contractor and more burdensome obligations in relation to contract administration.

FIDIC appears to have taken some of this feedback on board, softening the risk allocation that was previously viewed by some as not reflecting good industry practice. However, the new Books are still much more administratively burdensome than their 1999 counterparts, with various deeming provisions and time bars that may catch parties out if they are not careful. FIDIC has stated that the new Books are aimed at increasing clarity and certainty within the forms. However, the introduction of such numerous highly prescriptive procedures may not be what some users want to see.

Below, we summarise some of the key changes to the Yellow Book that users need to be alive to.

Risk Allocation

In terms of risk allocation, perhaps one of the most contentious amendments proposed by the consultation version was that relating to the Contractor's design risk. Under the consultation version of the Yellow Book, the Contractor was required to indemnify the Employer against all errors in its design which resulted in the Works not being fit for purpose or resulted in any loss / damage for the Employer. Furthermore, this indemnity sat outside the indirect and consequential loss exclusion and the aggregate cap on liability. In the 2017 Yellow Book, this indemnity has been retained but has been limited to errors in design resulting in the Works not being fit for purpose. In addition, Contractors will be happy to hear it is no longer carved out from the exclusion for indirect and consequential loss or the aggregate cap on liability. So while the indemnity itself may still be a point of contention, it is limited to an extent.

In addition, users will be pleased to know that the confusing amendments that had been proposed in relation to Employer's Risks and Contractor's Risks have been replaced with much simpler provisions. Effectively, the categories of what used to be referred to as 'Employer's Risks' have been expanded and now also include any act or default of the Employer's Personnel or other contractors. In addition, the Employer's indemnities in favour of the Contractor have been expanded to capture damage to property as a result of these liabilities. Importantly, both parties' liability under the indemnity provisions will be reduced proportionately to the extent that an event for which the other party is responsible has contributed to the loss.

Contract Administration

In terms of contract administration, one of FIDIC's main aims was for the second editions to stimulate better project management. This is reflected through:

  • more stringent requirements relating to notices;
  • changes to the programming provisions, including:
    • additional programming requirements; And
    • new deeming provisions for the acceptance of revised programmes;
  • the introduction of advance warning provisions:
    • similar to the NEC approach requiring each party to notify the other of any known or probable future events that may adversely affect the performance of the Works, increase the Contract Price or delay the execution of the Works;
  • changes in the role of the Engineer, including:
    • a requirement that the Engineer has suitable qualifications, experience and competence to act as the Engineer under the Contract and must act like a skilled professional;
    • new deeming provisions in relation to the issue of an Engineer's determination, which must be issued within 42 days of the parties failing to agree a matter, otherwise (i) in the case of a Claim, the Engineer is deemed to have rejected it; or (ii) in the case of any other matter, the matter is deemed to be a Dispute which either Party can refer to the Dispute Avoidance / Adjudication Board (DAAB) without the need for a Notice of Dissatisfaction (NOD);
    • a requirement that in making his / her determination the Engineer must act 'neutrally';
    • if a Party objects to a determination of the Engineer, a requirement that they issue a NOD within 28 days, otherwise the determination is final and binding; and
    • if either Party fails to comply with an agreement of the Parties or a final and binding determination, a right for the other Party to refer the failure directly to arbitration for enforcement by expedited procedure;
  • changes to claims provisions to encourage faster dispute resolution, including:
    • making the claims procedure and its time bars apply to the Employer as well as the Contractor;
    • extending the 42 day period for provision of the Fully Detailed Claim to 84 days and creating a time bar where the claiming Party fails to give a statement of the legal basis of its claim within this time;
    • new grace provisions allowing the claiming party to dispute that its NOD is time barred (whether by failure to comply with the initial 28 day timeframe or subsequent 84 day timeframe) by reference to the Engineer though the Engineer may only allow late submission if it is justified in the circumstances;
  • amendments to the final assessment provisions, including:
    • a requirement that the Contractor include all claims in its final statements (whether referred to the DAAB or not, and despite any NOD being issued in relation to them), otherwise the Employer will avoid all liability for them; and
    • the introduction of a 56 day time bar for the Contractor to dispute the Final Payment Certificate, otherwise it will be deemed accepted and the Employer will have no further liability; and
  • amendments to the DAAB process, including:
    • the appointment of the DAAB as a standing board;
    • the option for parties to request that the DAAB provide informal assistance under a new 'Avoidance of Disputes' regime; and
    • a new 42 day time bar to refer Disputes to the DAAB.

While one can see the logic behind some of the changes, the reality is that it will be contractors, more than employers, who are adversely affected by the amendments. The administrative burden of the changes will fall predominantly on contractors, with potentially significant consequences if notices or deadlines are missed. Moreover, while the changes are intended to encourage better contract management and avoid prolonged disputes, they will likely also result in formal dispute resolution being commenced at an earlier stage, in order to avoid time bars.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.