1. NEC 3 Engineering and Construction Contract (ECC) & Principles of Law
Éamonn Kirke
Wong Chear Ching

2. Outline of contents: Principles of Law
Various standard form of contracts
- Parties’ roles in different contract
3. NEC3 ECC form of contract
ECC Structure
ECC’s Core Principles
ECC’s Core clause, Main option, Secondary Option
Programme / Time
Dispute Management
Early Warning
Compensation Event
Notification, Quotation, Assessment and implementation

5. Introduction:

6. The initial aims were:
Achieve a higher degree of clarity than existing contracts.
Use simple commonly occurring language and avoid legal jargon.
Repeat identical phrases if possible.

7. New Terminology:
The ECC contract introduces a number of new terms which are peculiar to the ECC contract, such as:
Compensation Events - similar to variations, extensions of time and loss and expense under other contracts,
Contract Data – there are two parts – Part 1 is completed by the Employer as part of the Invitation to Tender documentation, and Part 2 is completed by the Contractor as part of his tender. If the Contract Data is not completed properly, then it will be very difficult to properly administer the contract 

8. Project Manager (PM) – similar to the Architect / Contract Administrator under other contracts
Schedule of Cost Components and the Shorter Schedule of Cost Components – Crucial in the assessment of Compensation Events
Works Information - Significant in understanding the scope of work, and in describing the constraints in providing such work
Risk Register – assists in creating awareness about project specific risks.
Fee percentages – there are several fee percentages that need to be tendered in respect of assessing cost, and a knowledge of their application is crucial when formalising an NEC 3 contract.

9. ECC’s Core Principles:
Essentially the ECC’s three core principles are intended to be:
Flexibility
Simplicity and clarity
A stimulus for good management.

10. ECC structure: Core clauses (nine sections) Option clauses: A – F
Dispute resolution options (W1 and W2)
15 secondary clauses
Option Y(UK)2 (relating to the Housing Grants Construction and regeneration Act 1996)
Option Y(UK)3 (relating to the Contracts (Rights of Third Parties) Act 1999.
Z Clauses

11. Core Clauses. Apply to all ECC contracts. General
The Contractor’s main responsibilities
Time
Testing and defects
Payment
Compensation events
Title
Risks and Insurance
Termination.

14. Options cont.:
Option D: target contract with bill of quantities, the financial risks are shared between the contractor and the employer in agreed proportions.
Option E: cost reimbursement contract.
Option F: management contract, a cost reimbursement contract where the risk is therefore largely taken by the employer, under which the contractor is paid for his properly incurred costs, together with a margin.

15. Therefore Options A and B are lump sum fixed price contracts.
And Options C and D operate a pain/gain-share mechanism.

16. Other ECC forms exist, together with published Guidance Notes:
Subcontract
Short form
Professional services
Adjudicator’s contract

17. Notices:
There are two ways in which the parties can correspond with each other – via notices or via communications.
The contract is very prescriptive with regard to notices – in particular under clause 13.7 which states:
A notification which this contract requires is communicated separately from other communications.

18. This means that a notice of Contractor delay or incurring additional cost cannot be simply written into the progress report or into the programme, and the progress report or the programme relied on as a notice, instead a separate communication is required for each compensation event.

19. Project Manager:
The Project Manager plays a pivotal role in administrating ECC contracts.
He/she is the key management person on behalf of the Employer.
All PM decisions should reflect the Employer’s business decisions.

20. Time & Programme

21. The process of programming the works is emphasised much more in the ECC than it is in most other standard forms of contract.
The Contractor is required to submit a detailed programme to the Project Manager for acceptance at the start of the project and issue updated programmes at regular intervals to take into account changes in the progress of the works.

22. The programme is a key management tool.
If the Contractor fails to provide a programme at the start of the project, 25% of the sums due under the contract can be withheld until a programme is submitted.

23. Programme: The Accepted Programme includes: Key dates
Method statement for each operation
Order and timing of operations.

24. The accepted Programme is likely therefore to be a collection of documents including:
Method statements
Histograms
Network diagrams
Bar charts

25. Reasons for not accepting a programme
Under clause 31.3 there are only four reasons not to accept a programme:
The Contractor’s plans which it shows are not practicable
It does not show the information which this contract requires
It does not represent the Contractor’s plans realistically or
It does not comply with the Works Information

26. Project Manager has to accept or not accept the programme within two weeks. If the Project Manager withholds acceptance for a reason not stated in contract it is a compensation event.
If the Project Manager does not respond within the period for Acceptance it is NOT deemed accepted.

27. Dispute Management: Disputes:
The ECC uses adjudication as the first step in resolving disputes before arbitration or litigation.
The focus however within the spirit of the contract, is dispute avoidance and not dispute resolution.

28. An unusual feature of ECC Contracts is that the parties cannot refer disputes to arbitration or court until the dispute has first been referred to adjudication.
It is important to consider whether this provision requires amending.
It may be unwise to agree to a dispute resolution provision which limits your discretion to deal with a dispute in the manner you deem most appropriate.

29. Options W1 and W2 Dispute Resolution mechanisms found in:
Option W1 (used where the HGCRA does not apply)
Option W2 (used in the UK where the HGCRA applies)

30. Engineering and Construction Contract – Contract Risks
Éamonn Kirke

31. Within this form of contract risk is apportioned under the following classifications:
Employer’s Risks,
Contractor’s Risks,
Compensation Events,
Early Warning:
Notification, Quotation, Assessment and Implementation:
Matters to be included in the Risk Register.

32. The Employer indemnifies the Contractor against Employer’s risks as provided in clause 83.
The Contract also provide that the Employer’s risks are compensation events (cl (14)).

33. Contractor’s Risks:
The risks other than the Employer’s risks are borne by the Contractor (Cl. 81).
This applies from the starting date to the date of the Defects Certificate.

34. Risk management: NEC 3 introduces a risk management system including:
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.

35. EARLY WARNING:

36. Early Warning and Risk reduction:
The ‘early warning’ procedure is one of the most important management tools contained within the ECC contract.
Both the Contractor and the Project Manager are each obliged to warn the other as soon as either is aware of a matter that could:
Increase the total of the Prices;
Delay Completion;
Delay meeting a Key Date or
Impair the performance of the works in use.

37. Clause 16.1 provides inter alia:
“The Contractor and the Project Manager give and early warning by notifying the other as soon as either becomes aware of any matter which could:
Increase the total of the Prices
Delay Completion
Delay meeting a Key Date
Impair the performance of the works in use
The Contractor may give an early warning by notifying the Project Manager of any other matter which could increase his total cost….”

38. The early warning procedures are included in clause 16. These provide:
The contractor to give the project manager warning of relevant matters;
A relevant matter is anything which could increase the total cost or delay the completion date or impair the performance of the finished works;
The contractor and project manager are then required to attend an early warning meeting if one or the other party request it. Others might be invited to that meeting.

39. The purpose of the early warning meeting is for those in attendance to cooperate and discuss how the problem can be avoided or reduced.
Decisions focus on what action is taken next and who is to take that action.

40. If the Contractor fails to give early warning:
Under Main Options A, B, C, D and E, a compensation event is valued as if the Contractor had given an early warning notice. This means that any change in Defined Costs or effect on Planned Completion that arises due to the Contractor not giving early warning, is discounted when assessing a resulting compensation event.
In addition, under Main Options C, D & E, any cost incurred as a consequence of the failure by the Contractor to give an early warning, is a ‘disallowed cost’.

41. The failure of a Project Manager to give early warning is not expressly stated within the Contract, however, such failure will likely result in an increase in cost or time or degrade in performance of the works, all sanctions against the Employer.

42. Clause 61.5 provides: Clause 63.5 provides:
“If the Project Manager decides that the Contractor did not give an early warning of the event which an experienced contractor could have given, he notifies this decision to the Contractor when he instructs him to submit quotations.”
Clause 63.5 provides:
“If the Project Manager has notified the Contractor of his decision that the Contractor did not give an early warning of a compensation which an experience contractor could have given, the event is assessed as if the Contractor had given early warning.”

43. Compensation Events:

44. COMPENSATION EVENTS:
Compensation events are ECC terminology for variations, loss and expense and extensions of time.
It is a single assessment procedure that deals with the entire effect of an event on time and money.

45. Broadly speaking section six comprises six main clauses, namely,
(i) Clause 60 defines compensation events,
(ii) Clause 61 deals with notification by either the Project Manager or the Contractor that a compensation event has occurred,
(iii) Clause 62 provides for Quotations
(iv) Clause 63 sets out the mechanism for assessing compensation events (time and money),
(v) Clause 64 deals with assessments made by the Project Manager and
(vi) Clause 65 explains how compensation events are to be implemented.

46. Clause 63.4 provides:
“The rights of the Employer and the Contractor to changes to the Prices, the Completion Date and the Key Dates are their only rights in respect of a compensation event”.
The intended effect of Clause 63.4 is to exclude the parties common law rights.

47. Accordingly, since the Contractor’s only rights lie through the Contract, in order to maintain his rights and obtain the relief to which he may be entitled, it is essential that the Contractor complies with the provisions of the Contract in relation to the notification of events which may constitute compensation events.
No timely notice, no financial relief and no extension of time for completion, culpable delay and exposure to delay damages.

48. NOTIFICATION, QUOTATIONS, ASSESSMENTS AND IMPLEMENTATION:

49. Notifying Compensation Events – A condition precedent
It is vital that anyone using the ECC is very familiar with clause 61.3.
“If the Contractor does not notify a compensation event within eight weeks of becoming aware of the event, he is not entitled to a change in the Prices, the Completion Date or a Key Date unless the Project Manager should have notified the event to the Contractor but did not.”

50. If he fails to give this notice (remember a separate communication is required for each notification) then he loses his rights to an adjustment to the Prices and the Completion Date.
Early warning notifications do not constitute notifications of compensation events. The two require separate notifications.

51. ‘Prevention Principle’.
A potential obstacle to the use of ‘time-bar’ clauses in this way is the ‘prevention principle’.
Deriving from the legal tradition that a party should not be allowed to profit from its own wrong, the prevention principle jeopardises employer’s rights of recourse for contractor default where that default is partly or wholly caused by the employer:

52. Quotations: Under ECC, a quotation has a special meaning.
It must deal with all the effects of a compensation event on both time and money.
The quote must be assessed using the procedures in the contract and, when providing his quote to the Project Manager, the Contractor must include details of his assessment and, if the compensation event affects the Completion Date or the Key Dates, a revised programme for acceptance.

53. If a quotation does not deal with all the relief sought and is accepted (or treated as accepted) by the PM, the Contractor will have lost his right to that part of the relief not dealt with by the quotation.
A quotation must be submitted within 3 weeks and on receipt, the Project Manager must respond within 2 weeks (or an agreed and notified extended period).
His/her reply must be one of the following four permitted responses:

54. An acceptance of the quotation;
A confirmation that a proposed compensation event will not be instructed;
A notification that the quotation has not been prepared properly (with reasons) and an instruction to resubmit;
Ditto, with a notification that the Project Manager will instead assess the compensation event.

55. This method of assessment forms the basis of a quotation.
Value does not enter into the matter, assessment is cost (i.e. Defined Cost) based.
The term “work” used alone is not confined simple to the work required by the compensation event.
The Defined Cost of any work affected by the compensation event is taken into account in a quotation/assessment.

56. Under Options C, D, E & F Defined Cost is defined as:
Assessments are made on the basis of ‘Defined Cost’. It is important to note that the definition of Defined Cost varies between the Main Options.
Under Options C, D, E & F Defined Cost is defined as:
“the amount of payments due to Subcontractors for work which is subcontracted And the cost of the components in the Schedule of Cost Components for other work ”

57. Assessments:
A compensation event is assessed as the effect of the event on:
The actual Defined Cost for work already done plus the Fee; and
The forecast Defined Cost for work not yet done plus the Fee; and
Planned Completion as shown on the latest accepted programme.
The cut off point between work done and work not already done is the date of the instruction to provide the quotation.

58. Implementation:
When a compensation event is ‘implemented’ it means it is finalised and cannot be changed by the parties, only by an adjudicator.

59. Thank you & Q&A session