CIVIL ENGINEERING MANAGEMENT I Construction Law PART ONE New Engineering Contract
CIVIL ENGINEERING MANAGEMENT I
New Engineering Contract (NEC)
The NEC was first published by the ICE in 1993 as a result of the discontent with the other forms of contract. They wanted to create a contract that moved away from the traditional JCT litigating approach and could become of international use.
The NEC endeavours to be a contract “written by managers for managers”. The underlying principle is the belief that mistrust and confrontation is costlier to all the parts than good management and co-operation. Flexibility and co-operation among the parties can lead to savings in cost and time that can be shared to everybody´s benefit.
NEC3 is the latest version from 2005, updated in 2013. NEC have 3 clear features:
They are written in simple, plain English so they can be easily understood.
They propose six main options (A-F) which vary on how to price the project, pay the contractor and allocate risks.
The different parties in the contract work as a team to deliver projects on time, budget and to the best possible standard.
Project Manager Role (PM)
In the NEC, the Project Manager is the leader of a team that includes all the other parties (Consultants, Contractor and Subcontractors). He runs the project on behalf of the Employer, listens to the parties and takes the main decisions.
Early Warning and Compensation Event Procedure
In the NEC, any claim actual or potential must be made as it arises. Both the contractor and the PM are obliged to warn each other whenever they become aware of something that has or could affect performance of works, rise costs or delay completion. Mistakes incurred by either party that could affect these variables, must also be communicated.
Any early warning that increases the contractor’s total cost may then lead to a compensation event. If the event isn’t the contractors fault (for example weather or site conditions), it entitles him to claim for more money and/or time.
Whenever a compensation event arises, the contractor has to provide a quotation. This is basically a summary on how this event will affect the project and a proposal on how to overcome the issue successfully.
This is the NEC approach for not having final accounts. The contractor has the obligation of notifying on any compensation event within 8 weeks of becoming aware of it. If he fails to do so he will lose the right to claim any additional time/money.However, he doesn’t lose this right if it was the PM who should have informed on the event and did not.
This procedure allows any issues to be discussed and resolved as they appear during the project instead of being left aside until the end.
Risk Registers with incentives
NEC3 requires the Project Manager to maintain a risk register. Any early warning that is notified has to be included in it. All risks have to be described and include any actions that will be taken to avoid it. It must also be stated which party is going to be responsible for taking those actions.
Maintaining the risk register is an incentive for all parties. The PM wants to tackle early warnings effectively so the project has no delays and minimal extra costs. Moreover, the contractor doesn’t want to lose any opportunity on claiming compensation events and wants the project to be finished on schedule so he can be fully paid.
NEC3 also offers the PM and the contractor the right to call a risk reduction meeting to which they both have to attend to discuss and offer solutions to the risks.
In NEC disputes are normally settled through arbitration. In arbitration, the parties nominate and select one or several candidates to act as the arbitrator. The arbitrator then listens to both sides, their arguments and evidence, and makes a final decision to settle the issue which must be accepted by the parties. This is a private and much quicker process than litigation. Arbitration costs are also much cheaper than litigation costs, which is another reason for why parties prefer this process.
Joint Contracts Tribunal Contracts (JCT)
The JCT contract is the most widely used in the UK. The JCT was established in 1931 by the RIBA and the NFBTE to set the standard for contracts in the construction industry. Broadly speaking, the JCT is a contract “written by lawyers for architects” and is written in legal terms to leave scarce space to interpretation. JCT11 is the latest version of the contract which was updated in 2016.
The JCT tries to avoid the Employer unpleasant surprises and therefore establishes a pricing method, leaving the settlement for the end of the project, when the Employer is no longer a hostage to the Contractor. Critics to the JCT approach say that it is prone to cause confrontation and frequently induces unnecessary litigation.
In JCT the contract administrator is the intermediary between Employer and Contractor, traditionally this role is assumed by the architect. He is responsible for the supervision and valuation of the work but is not entitled to interfere with the arrangements made by the Contractor as long as they do not affect the result of the project.
Notice and Loss/Expense Procedure
In the JCT 2016, the contractor has to notify the administrator as soon as any relevant matter affecting progress or the possibility of any loss and expense has occurred or can occur. He also has to give monthly updates on the issues until there is enough information to precisely determine the full amount of such loss and expense. This tries to avoid claims being notified long after the event has passed. However, unlike in NEC, JCT doesn’t have a specified maximum number of days for issuing the claim.
In this update, the contract administrator does have time constraints while before there he had no time limit. The initial claim has to be assessed within 28 days of being notified and for every update he has 14 days to respond.
Those issues that cannot be agreed are left out to be reconsidered in the final account at the completion of the project to agree on how it affected time/money wise. The final account is to be done no later than 6 months after the project is completed.
This approach can be beneficial because revisiting the matter once the project is complete gives a much more objective view on the real extent of the problem. Sometimes issues that appear during the works seem much bigger than what they actually end up being. However, once the project is completed, the parties are much less reliant on each other which can result in unfair agreement and litigation.
Standard Allocation of Risks
The JCT 05 contract 15 identifies four different categories of risk:
Risk of personal injury/death.
Risk of damage to property other than the Works and Site Materials.
Risk of damage to the Works and Site Materials.
Damage from the Excepted Risks.
These are defined in the contract and the responsibility for them distributed among the Employer and the Contractor in a set way.
Under JCT, a disagreement in the final account frequently must be settled in by litigation. Civil litigation is settling disputes through court, with a judge or jury making the decision. In litigation, the parties have no say on who is going to be appointed judge. It is a public and legal process, much more formal than arbitration. It is also a longer process because the parties need to wait until the court is available to hear their case, which could be months or even years. The costs of litigation are higher because the legal procedures can be very expensive. Small companies tend to lose the disputes to big firms because they have smaller resources. However, unlike in arbitration, decisions can be appealed (provided certain conditions).
The NEC Approach
There are several aspects that make the NEC approach much more attractive than the JCT.
It makes it easier to avoid adversarial behaviour. Mutual mistrust leads to a more inefficient outcome than co-operation.
Its philosophy for co-operation, especially with the “gainshare/painshare mechanism” in Option C, provides a wider perspective on ideas and solutions. In this mechanism, the contractor may suggest ideas to improve the design which could cut costs and reduce the total time. This is an incentive for all parties because they will share the savings achieved.
The early warnings procedure allows any possible risks that could delay the project to be tackled immediately and be resolved during the project, not left until the end like in JCT.
The risk meetings include all parties to discuss possible solutions while in JCT’s notice and loss procedure the employer just ascertains the expense of the Contractor’s solution.
Settlement by arbitration is much more efficient in time and cost than litigation.
Nevertheless, the NEC approach also has some drawbacks:
As it is written in plain and not legal English, it is easier to understand but is also subject to misinterpretation which could cause disputes between parties.
Option C also has the drawback that if there is an increment in cost the expenses will also be shared between all parties.
NEC procedures are time consuming and resource hungry. You may find there are endless unproductive meetings and communications that require much manpower.
In NEC, unlike JCT, the contractor is subject to the risk of losing the right to claim any compensation events if he doesn’t notify them in time.
Settlement by arbitration cannot be appealed.
Duty of Care
Duty of care is the legal obligation of ensuring the safety of others while executing any action that can possibly harm them. Duty of care was established in 1932 in the case Donoghue v Stevenson where it was decided (by Lord Atkin) that you owe duty of care to your neighbour, who is defined by “persons who are so closely and directly affected by my act that I ought reasonably to have them in contemplation as being so affected when I am directing my mind to the acts or omissions that are called in question.”21
Tort law doesn’t have a contract so all the responsibilities are covered by the duty of care. The “reasonable person” 22 behaviour tests whether or not someone has broken their duty of care. This is a made-up man who always thinks on the other people’s safety before acting. Whenever an individual is proven to break the duty of care he owed to someone (intentionally or unintentionally) and damage them in some way, he has been negligent. Negligence is the most common form of tort.
Contract law is the set of rules covered in a contractual agreement between two or more parties. The contract, which must be agreed by both parties, establishes a legal relationship between them. Duty of care is not relevant to contract law because the obligations they owe each other are stated in the contract. It is important to understand that anyone can sue another person for negligence, but, in contract law, due to the privity of contract, only the parties to a contract are able to sue or claim damages.
Measure and Extent of damages
To establish tort, you need to prove duty, breach and loss. Once the defendant has been found negligent, causation has to be proven. The key test for causation is the ‘but for’ test which tries to determine if the damage was or wasn’t as a result of the negligence occurring. The foreseeability test then shows the remoteness of the negligence. This test basically questions if it was predictable that the damage was going to occur. If it is demonstrated that the damage was too remote then the defendant is not guilty. Pure economic loss is the term used for pure money claims that are not recoverable under the law of negligence. These claims cannot be recovered because there is no physical damage present in the tort claim (either to person or property). Unlike in contract law, compensation tries to insure for the damage done, because it could be impossible to put the claimant in the position he would be if the negligence hadn’t occurred. In addition, sometimes punitive damages are awarded to the defendant so his actions are not repeated.
When the contract duties are breached, compensation has to be given for the damages. There are two types of damages, unliquidated and liquidated. In unliquidated damages, a breach of contract occurs and the parties have no pre-calculation on payable damages. In this case the compensation will try to place the injured party in the same position as if violation of contract hadn’t occurred. However, remoteness also has to be considered. As there could be an infinite number of consequences, only the losses which are reasonably considered direct result of the breach or any possible losses which both parties were aware of at the time can be recovered. Sometimes, the contract will include a liquidated damages clause. This is a genuine pre-estimation of the required compensation for damages in case of violation of contract and a detailed explanation on how this amount was determined. If the contract does include it, then this will be the compensation paid even if the breach was of less amount. However, it must not be mistaken for a penalty clause, which is not a reliable estimate and cannot be enforced as compensation. Some contracts include these clauses in case of delays, also including an extension of time.
Complimentary nature of contract and tort
Contract and tort law are needed to regulate the built environment. This is because a construction project doesn’t only affect the parties involved in the works, it affects third parties as well. Under contract law, a legal relationship is established between the employer and the contractors but parties outside of the contract have no right to claim damages. Tort law covers the duties they owe to these third parties. All the parties involving a project need to obey their obligations stated by the contracts and they must also understand that they have a duty of care to the built environment.
In any project, tort claims are very common. This is due to the works affecting the people or the built environment around it, for example: neighbouring buildings being damaged, general disruption to the everyday life, blocking public spaces like roads, etc. None of the parties involving the project are interested in paying compensation for tort claims, so everyone needs to have very clear the duty of care they owe to the built environment.
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