This article sets out, in a fair amount of depth, the key mechanisms within the NEC3 Engineering & Construction Contract (ECC) that can be used to help deal with the effects of the coronavirus outbreak. The mechanisms in this contract are materially the same as its NEC4 counterpart, as well as those within the other forms of NEC contract.
Before reading on, please note that the information below is based on the NEC3 ECC in its unamended form. If your project is likely to be affected by the coronavirus outbreak, then you should check to see if any of the clauses referenced below have been amended.
Clause 16 of the contract contains the early warning mechanism. Given that it now seems inevitable that projects will be disrupted by the coronavirus outbreak, all parties involved should use the early warning mechanism as soon as possible in an attempt to mitigate its effects.
Under clause 16.2, the Project Manager or the Contractor can instruct the other to attend a risk reduction meeting. The Employer can also be asked to attend.
A face-to-face risk reduction meeting may not be the best idea at this point in time (for obvious reasons). I would therefore recommend to the Parties that they arrange to have a risk reduction meeting via telephone or skype as soon as possible with the Project Manager, Contractor and Employer all in attendance, the aim of this being:
The list above is not exhaustive. The point of the risk reduction meeting is to discuss the issue in order to determine what action needs to be taken, by who and by when. It is quite possible that, following the risk reduction meeting, the parties might agree to a course of action that would result in a compensation event. We discuss that mechanism separately below.
Clause 19.1 of the contract deals with events which ‘stop’ the Contractor completing the works on time, or at all. The Project Manager is required to instruct the Contractor on how it is to deal with such an event if the event satisfies all three of the bullet points below:
If the Contractor’s labour and/or office staff are required to self-isolate because of coronavirus, it is likely that this will stop the works being completed as per the Accepted Programme, triggering the requirement for the Project Manager to give the clause 19.1 instruction.
In terms of an observation, as at the date of this article, we are probably not at the point where a Project Manager’s instruction under clause 19.1 is required. That said, cases of coronavirus are increasing rapidly. If this increase gets to the point where a Contractor can no longer can put resources on the project, then undoubtedly the clause 19.1 instruction would be required.
The Project Manager’s clause 19.1 instruction could be for the Contractor to stop work for a period of time. If this is the case, then that instruction would be a compensation event under clause 60.1(4) i.e. an instruction to stop work, not to start work or to change a Key Date.
This takes us neatly on to the compensation event mechanism.
The coronavirus outbreak could result in a number of the compensation events being triggered under clause 60.1, such as:
In terms of who should notify the compensation events above, the answer depends on which compensation event has occurred. I have summarised the notification requirements below:
If I was to speculate, I would say that there is going to be a number of fall-outs in the coming months over who should have notified the effects of the coronavirus outbreak as a compensation event. There is also likely to be arguments over whether or not a Contractor who did notify, did so within the eight week ‘time bar’ set out at clause 61.3.
To try and avoid these arguments taking place, and spending unnecessary legal fees to sort them out, I would recommend that the parties adopt the following three-part procedure:
If the mechanism outlined above is adopted and clearly backed by correctly issued communications under clause 13, then it would be very difficult for either party to argue that the other did not correctly notify the coronavirus outbreak as a compensation event.
Regardless of what compensation event the coronavirus outbreak falls under, it will be assessed in accordance with clause 63 of the contract using the normal assessment principles used for all compensation events.
This means that the Contractor is entitled to:
The main difficulty in assessing a compensation event triggered by the coronavirus outbreak will be the requirement to forecast its effects into the future. This is a difficulty which is bespoke to the NEC contract because the NEC compensation event mechanism is premised upon compensation events being assessed whilst a project is on-going, instead of waiting until the end when all of the effects of the event are known.
Because there is a requirement to forecast the effect of a compensation event, clause 63.6 requires the assessment to include a cost and time risk allowance for matters which have a ‘significant’ chance of occurring.
When it comes to pricing a compensation event triggered by coronavirus, a Contractor is therefore entitled to price in risk allowance for risks which have a significant chance of occurring. The question is, what risks have a significant chance of occurring?
Well, there is the very real risk that the UK could go down the route of Italy/Spain by effectively placing the country into lockdown. If this was to happen, then massive project delays and increased costs will be inevitable. On the other hand, we could potentially see a vaccine in the coming months that might end any disruption. There is then a range of different options in between which will affect different types of project in different ways.
In terms of advice, Contractor’s should be erring on the side of caution when calculating the potential time and money effects of the coronavirus outbreak. That means taking into account the worst-case scenario. It is going to be a difficult conversation to have, but it needs to be done.
The NEC does however have a mechanism for dealing with the assessment of events which are very difficult to forecast. I have described this mechanism in the bullet points below.
To validly terminate an NEC3 ECC, there must be a valid reason for termination and the parties must follow an appropriate termination procedure.
It is far too early to be talking about terminating contracts because of the coronavirus outbreak. That said, it is worth unpacking the termination provisions of the contract to see how and when a valid reason for termination may arise in light of current events.
The 21 valid reasons (R1 – R21) for termination are listed at clause 91 of the contract. I do not review each reason in detail, as several will not be triggered by the coronavirus outbreak. The reasons I have reviewed below are what I consider to be the most likely reasons to arise out of the coronavirus outbreak.
These reasons entitle EITHER party to terminate the contract if the other party enters into some form of insolvency procedure.
It is too early to speculate on the impact that the coronavirus outbreak will have on company finances. I have no doubt that all parties to the contract will face financial strain in the coming months, and that as a result, some companies will become insolvent.
This reason entitles the EMPLOYER to terminate the contract if the Contractor is notified of a substantial failure in its performance and such a default is not ‘put right’ within four weeks of the notification.
If a Contractor is unable to comply with its obligations, because its resources have been placed into self-isolation, then you may initially think that this reason for termination becomes valid. It is not as straightforward as that.
This reason for termination is always troublesome because the drafting is slightly ambiguous. It is not particularly clear what will amount to a ‘substantial failure’. It is also not particularly clear what it means to ‘put right’ the substantial failure. These are questions for another article!
In addition, as discussed above, it is likely that the coronavirus outbreak would result in a number of compensation events being triggered under clause 60.1. If this is the case, then the Contractor’s substantial failure to perform would be excused by the intervening compensation event.
Taking the points above into consideration, I would advise Employers to tread with extreme caution if considering R11 as a reason to termination because of coronavirus.
This reason entitles EITHER party to terminate the contract if the parties have both been released under the law from further performance of the whole of the contract.
It is generally thought that R17 is not relevant under English Law. People often cite this clause when discussing topics such as ‘frustration’ and ‘force majeure’. Neither of these legal concepts link to R17.
In English Law, the concept of frustration operates to ‘kill the contract and discharge the parties from further liability under it’ (KNS Industrial Services (Birmingham) Ltd v Sindall Ltd (2001)). As a result, if frustration was to occur, there would be no need for the parties to exercise their rights of termination under the contract as the contract is no more, it has ceased to be, it has expired and gone to meet its maker (to quote John Cleese).
Similarly, the concept of ‘force majeure’ has no place in this clause. In English Law, force majeure refers to a clause that relieves one of the parties of performance in circumstances of the intervention of a higher force, that is not the responsibility of either party. Under the NEC3, this is covered by clauses 19 and 60.1(19),which are discussed above, as well as R21 which is discussed below.
This reason entitles EITHER party to terminate the contract if (1) the Project Manager instructs the Contractor to stop or not to start work (2) the work is not allowed to re-commence within 13 weeks and (3) the reason for stopping the work was not due to a default of the Contractor or Employer.
As set out previously, if the Project Manager instructs the Contractor to stop work because of the coronavirus outbreak, then that instruction is a compensation event under clause 60.1(4). This reason for termination is effectively a ‘back-stop’ which enables either party to terminate the contract if the works are not recommenced within 13 weeks.
It is almost impossible to forecast the trajectory of the coronavirus outbreak. The optimist in me says that it is very unlikely that projects will be fully stopped for 13 weeks. If this is the case, then this reason for termination is unlikely to arise.
Termination under R20 would entitle the Contractor to the costs it has incurred to date, plus an allowance for removing any Equipment from the site.
This reason entitles the EMPLOYER to terminate the contract if (1) an event occurs which stops the works being completed or (2) an event occurs which is forecast to delay Completion by more than 13 weeks.
This clause could be extremely important in light of current events. As discussed previously, the outbreak of coronavirus is likely to be a compensation event under the contract which would entitle the Contractor to recover additional time and money as a result.
The ability to claim additional money, coupled with the uncertainty of how long projects are going to be affected by coronavirus, is likely to lead to Contractor’s being entitled to very large claims for additional payment under the contract. Employer’s will be faced with making a commercial decision as to whether it is more favourable to pay this amount, or alternatively, to terminate the contract under R21.
Termination under R21 would entitle the Contractor to the costs it has incurred to date, plus an allowance for removing any Equipment from the site.
I appreciate that this is a rather long article, but hopefully you found it useful. To summarise:
If you have any questions in regards to the article please contact William on 028 9032 1022 or email William.Brown@QuiggGolden.com
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