Recent guidance on NEC3

Just like buses! There have been very few cases where the courts have given guidance on NEC 3, and now two have come along at the same time. One deals with the extent to which a contractor can recover costs beyond its cap on liability under NEC 3 option C. The other deals with an NEC Compensation Event.

Two recent cases have thrown a little light on how the courts view the NEC.

As always with cases, they are facts specific. I will start with the case of Amec Group Limited v Secretary of State for Defence. This is a decision about the design and construction of a facility to support nuclear submarines at HMNB Clyde. The contract was based on NEC3 Option C. The issue was the extent to which Amec could recover costs incurred by it beyond its cap on liability.

The Secretary of State for Defence argued that Amec should only recover their actual costs reasonably and properly incurred. Amec contended they should recover all costs incurred by them beyond the cap. The judge favoured the Secretary of State’s argument.

Key points from the judgment are:

  1. It would be a bizarre conclusion for a contractor to recover from its employer the cost of rectifying its own breaches of contract and to be entitled to be paid to remedy defects they had caused in the first place.
  2. It would be commercially surprising if the parties intended that a contract, which depended throughout on the ascertainment of actual costs, could go so badly wrong that a contractor’s actual costs then became irrelevant and it could recover all its costs however unreasonably or improperly incurred.

This is reassuring if you are an employer, but not such good news if you are a contractor. The inference to be drawn from the court’s approach is that it is not going to be terribly sympathetic to a contractor arguing it can recover costs incurred due to its own breach of contract.

It would though be sensible to look at the range of Disallowed Costs in NEC3 Option C to review what is a breach of contract, when the ability to deduct for defects arises and consider what is meant by a contractor justifying its costs through accounts and records. It would also be sensible to clarify that Defined Costs are limited to costs reasonably and properly incurred.

In the case of Atkins Limited v Secretary of State for Transport Mr Justice Akenhead felt moved to state, that the NEC 3 conditions, are:

“… highly regarded in the sense that they are perceived by many as providing material support to assist the party in avoiding disputes and ultimately in resolving any disputes which do arise”.

However he also stated that:

“There are some siren or other voices which criticise these Conditions for some loose language, which is mostly in the present tense, which can give rise to confusion as to whether and to what extent actual obligations and liabilities actually arise.”

The issue in Atkins case was whether the number of potholes encountered during the course of a contract to manage a highways network was excessive - more than an experienced contractor or consultant would have judged at the Contract Date to have been present. The contract had in it a version of NEC Compensation Event clause 60.1(12) (physical conditions). The court outlined events that might lead to more potholes existing than anticipated. The court noted that if there were less potholes there might be less work to do. If there were more potholes the reverse of course applied, so either party may win or lose.

The judge agreed that there was no grounds for a Compensation Event just because an excessive number of potholes were encountered.

It appears when making a claim for extra work, a contractor is going to need to establish that what has been encountered is something out of the ordinary.

The two cases, Amec and Atkins, indicate the court apparently taking a pro-employer stance on the interpretation of the NEC contract and contracts based on it. That should not lull employers into a false sense of security or give contractors nightmares, as each case will depend on its contract and facts.

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