NEC4 and FIDIC compared
The year 2017 will see the introduction of new editions of the FIDIC and NEC forms of contract. Having been trialled last year in a pre-release version, FIDIC are launching the second edition of their Rainbow suite of contracts in December, whilst, on 22 June 2017, the NEC4 form was revealed. Jeremy Glover explains some of the changes to both contracts and at the same time highlights some of the differences between the NEC and FIDIC forms.1
Use of the FIDIC and NEC forms
The first edition of the Conditions of Contract (International) for Works of Civil Engineering Construction was published in August 1957, whilst the New Engineering Contract (“NEC”) was first published in March 1993. In the UK, NEC3 was the contract of choice of the Olympic Delivery Authority who were responsible for the planning, designing and building of the venues, facilities and accommodation, and developing the infrastructure to support these, for the 2012 Olympic Games. NEC3 is also widely used in the decommissioning of nuclear power stations and is currently being used on Europe’s largest construction project, the Crossrail project in London. FIDIC is not used so much in the UK.
Since April 2015 all Hong Kong Government works departments have been required to tender new projects using the full suite of NEC3 contracts. The NEC3 has also been widely used on major projects in South Africa; the South African Construction Industry Development Board currently recommends NEC3 contracts for public sector use in South Africa. In South Africa the NEC3 form, along with FIDIC, is one of four contracts authorised for use under the Construction Industry Development Board (CIDB) Act. Against it, it has been said that more contracts are let under the FIDIC Red Book, annually by number, than any other single international form of contract and that the FIDIC Red Book has been and is being used in more countries around the world (160) than any other form of contract.2
When the NEC announced at the beginning of March 2017 that they were releasing the new NEC4, they said that the three core drafting principles were as follows:
- stimulus to good management;
- support the changing requirements of users; and
- improve clarity and simplicity.
- The underlying philosophy behind the FIDIC 2016/2017 update is quite similar, including:
- to enhance project management tools and mechanisms;
- to achieve a balanced risk allocation. This is being achieved through more reciprocity between the Parties;
- to achieve clarity, transparency and certainty; and
- to reflect current international best practice.
At the June 2017 conference, where the new form was released, the NEC made clear that their approach was “improvement through collaboration” or “evolution not revolution”. That does not appear to be the case, with the pre-release version of the FIDIC Yellow Book being 50% longer than the 1999 version. So the NEC4 is very much an update, the key features are the same and the contract unsurprisingly still adopts the same plain English style. As well as updating the existing NEC3, a new Design Build Operate contract has been introduced and the NEC are also planning to introduce an NEC4 Alliance Contract. The NEC form has also adopted gender neutral drafting, something FIDIC is expected to follow.
As with FIDIC, the NEC4 makes use of deeming provisions. A contractor’s programme will be deemed to be accepted if the project manager does not respond within the contract timescales. Again, as with FIDIC, the NEC4 introduces a requirement for the contractor to prepare a quality management plan.
Structure and Format
There has been little change here. The FIDIC forms reflect different risk profiles: design and build (Yellow Book), turnkey (Silver) and build-only (Red). With the NEC, the contracts are arranged according to alternative pricing options: lump sum (option A), re-measurable (option B), target cost (options C and D) and cost reimbursable (option E).
Both FIDIC and the NEC aim for standardisation. The 1999 Rainbow Suite contracts all have 20 clauses. This will increase to 21 and there is a high degree of similarity across the suite. The 1999 FIDIC form works by having standard clauses known as general conditions and then the parties have the option to introduce Particular Conditions, which are meant to be project specific.
The foundations of the NEC form are the nine sections containing the core clauses. Beyond these, a user selects the appropriate main option clauses to produce the contract appropriate for the chosen procurement pathway. There are then a series of secondary option clauses known as X-clauses. Finally, there are the additional conditions of contract known as Z-clauses. These provide the parties, more usually the Employer, with the opportunity to insert bespoke terms or amendments into the contract.
It is then up to the project participants to put the contract together. Care needs to be exercised when doing this. In Transnet Soc Ltd v Group Five Construction (Pty) Ltd and Others,3 Jeffrey AJ noted of an NEC3 contract that:
“This contract, in the result, contains a bewildering array of provisions derived from the various NEC options, several of which were incorporated into the contract by the parties and which follow neither a numerical sequence nor a uniform description. Also, the words used in the blanks completed by the parties are often couched in a cryptic shorthand style."
It is unclear from the judgment the extent to which the parties had moved away from the preferred NEC approach, but parties would do well to take heed of the words of Donald Keating as recalled by Mr Justice Coulson in the case of Fenice Investments Inc v Jerram Falkus Construction Ltd4:
“Donald Keating always advised parties who intended to sign up to construction contracts that they should either use an unamended standard form of contract, or their own homemade contract conditions, and that to attempt a mixture of both was usually a recipe for disaster.”
Both the FIDIC and NEC Forms lean towards the use of an unamended standard form, but acknowledge that some amendment may usually be needed to take account of the particular project conditions.
Previously the NEC had prepared a guide entitled “How to use BIM with NEC3 Contracts”. This is no longer a part of the NEC4 contract suite. The “How to” guide had also explained how NEC3 could be used with the CIC BIM Protocol. All references to the CIC Protocol are now gone.
The new NEC4 contract instead includes a new secondary option, X10, specifically to support the use of BIM. This, the NEC have said, will provide “the additional contract clauses required to support the production of information for BIM”. As well as dealing with issues such as the Model, ownership and liability, under the new BIM option the Contractor will be required to provide an Information Execution Plan (the more standard phrase in general use is the BIM Execution Plan) for incorporation in the contract either from the outset, or within a period defined by the Client.
There is no mention of BIM in the pre-released second edition of the 2017 Yellow Book. That is not to say that FIDIC has neglected BIM, far from it. At least three of FIDIC’s committees5 have been asked to consider how best to deal with BIM. One particular difficulty for FIDIC is that, as an international form of contract, it is designed for use throughout the many different jurisdictions and cultures within which the engineering and construction industry operates. There is far from being any uniform or standard approach. This is why any particular amendment to the Rainbow Suite itself is not expected. FIDIC’s approach is more likely to be in the form of a Guidance Note or perhaps a Protocol for use with the FIDIC form.
The programme and extension of time claims
In keeping with the trend in international contracts, and in line with the Red Book subcontract, the second edition of the FIDIC form will include increased programming obligations (16 are listed) within new sub-clause 8.3. NEC4 adopts a similar approach in clause 31.2. Although FIDIC have retained their position that the programme does not become a contract document, the Engineer is required to review the programme and say if it does not comply with the contract. If the Engineer does not do this within 21 days, then the programme is deemed to comply. There is also a positive obligation on the Contractor to update the programme whenever it ceases to reflect actual progress.
With FIDIC, there is an interesting reference to concurrent delay, with new sub-clause 8.5 saying that if a delay caused by the Employer is concurrent with a Contractor delay, then the entitlement to an extension of time shall be assessed:
“in accordance with the rules and procedures stated in the Particular Conditions”.
This rather neutral comment, which does not appear in the NEC Form, will of course have the effect of raising the issue of concurrency as a matter that needs to be dealt with by the parties when they negotiate and finalise the contract.
Under the FIDIC form, the Contractor will usually find itself subject to a fitness for purpose obligation in respect of anything it designs. Clause 4.1 says this:
“When completed, the Works shall be fit for the purposes for which the Works are intended as defined in the Contract.”
Under English or Common law, the fitness for purpose duty is stricter than the ordinary responsibility of an architect or other consultant carrying out design where the implied obligation is one of reasonable competence to “exercise due care, skill and diligence”.
In Viking Grain Storage v T.H. White Installations Ltd,6 Judge John Davies said:
“The virtue of an implied term of fitness for purpose is that it prescribes a relatively simple and certain standard of liability based on the ‘reasonable’ fitness of the finished product, irrespective of considerations of fault and of whether its unfitness derived from the quality of work or materials or design.”
The NEC scheme is not always totally clear. Design is not mentioned in the core clauses, but the secondary options do deal with design liability. Under NEC3, X15.1 provides that:
“The Contractor is not liable for Defects in the works due to his design so far as he proves that he used reasonable skill and care to ensure that his design complied with the Works Information.”
The requirement that the Contractor prove that it used reasonable skill and care has been amended slightly. Under NEC4:
“The Contractor is not liable for a Defect which arose from its design unless it failed to carry out that design using the skill and care normally used by professionals designing works similar to the works.”
However, regardless of whether or not the NEC contract includes X15.1, a Contractor should check to see whether the obligations in the Scope (formerly Works Information) actually impose a fitness for purpose obligation on any elements of design carried out by the Contractor.
Collaboration and good faith
Both the NEC and FIDIC contracts share an increased emphasis on collaboration. With the NEC4, an option has been included to appoint a contractor at an early stage, to participate in the development of designs and proposals. The basic idea is that this enables the contractor to consider the design at an early stage when there is still scope to introduce improvements and/or costs savings.
There is no good faith obligation in the FIDIC form, although such an obligation is implied by most civil codes. However, clause 10.1 of the NEC form does include an obligation to act in a spirit of mutual trust and cooperation. In 2017 Mr Justice Coulson had the chance to consider the meaning of this clause in the case of Costain Ltd v Tarmac Holdings Ltd.7 He also noted the comment in Keating on NEC3, that a parallel can be drawn between “mutual trust and cooperation” and obligations of “good faith”. Keating on NEC3 refers to the Australian case of Automasters Australia PTY Ltd v Bruness PTY Ltd,8 which says this:
“1. What is good faith will depend on the circumstances of the case and the context of the whole contract.
2. Good faith obligations do not require parties to put aside self-interests; they do not make the parties fiduciary.
3. Normal reasonable business behaviour is permitted but the court will consider whether a party has acted reasonably or unconscionably or capriciously and may have to consider motive.
4. The duty is one ‘to have regard to the legitimate interests of both the parties in the enjoyment of the fruits of the contract as delineated by its terms’.”
Mr Justice Coulson further noted that Keating also said that the term of mutual trust and cooperation suggests that:
“whilst the parties can maintain their legitimate commercial interests, they must behave so that their words and deeds are ‘honest, fair and reasonable, and not attempts to improperly exploit’ the other party.”
FIDIC have included a new early warning clause (8.4) in the updated Rainbow Suite. This follows the scheme of the clause to be found in NEC3 and the FIDIC Gold Book. Under the NEC4 scheme, for clarity the risk register has been renamed as the early warning register, and under clause 169 the Project Manager prepares a first early warning register within one week of the starting date. Regular early warning meetings are then to be held, beginning within two weeks of the starting date.
The NEC approach is drafted to encourage the identification of problems and for the parties to work together in order to establish an early resolution. This provides that a Contractor will only be compensated on the basis that an early warning had been given, based upon the date on which an experienced Contractor would have or ought to have recognised the need to give a warning. Contractors are therefore encouraged to play their part in the early warning procedures, in order to avoid inadequate cost recovery for those problems which materialise later on. FIDIC is not so obviously prescriptive, but there is no reason why similar arguments cannot be raised.
Claims and notices
FIDIC have made it clear that a notice given under the new contract must clearly state that it is a notice and make reference to the sub-clause under which it is issued. The NEC3 form already did this. This is to try and reduce disputes about what is a notice where parties try and argue that references in a programme or progress report actually constitute notice of a claim. There is an obvious benefit in defining a notice as being one that needs to be identified as a notice and including the sub-clause. However, it is equally true that this is not the type of provision that is strictly followed. A failure to identify notices will then mean that there will be arguments about whether a particular notice is a notice or not. Any such arguments will not simply be answered by the new FIDIC definition, as local law, and the factual matrix surrounding the event may well still come into play.
Disputes as to whether a notice is a notice or not may well continue despite FIDIC’s best intentions. Indeed, as we have explained in our article on page 30 of this Review, the new sub-clause 20.3 does provide the DAB with the power to waive a failure to follow a time bar requirement. This is not something to be found in the NEC4 form, which like FIDIC includes a time bar on Contractor claims.
FIDIC are clearly trying to move towards “real time” claims management. This is in line with the NEC approach and is clearly potentially a good thing, and fully in keeping with current contract trends. It is sensible to encourage the notification and early review of issues relating to extensions of time and the financial impact of change in delay as the work progresses. It is fresh in everyone’s minds and it should be easy to assess. There should be benefits for everyone. For the Employer, they will be better informed about the moving contract price and likely completion date. In theory, the Contractor should then also obtain better cash flow.
However, the proposed notice and claims procedures will undoubtedly place an increased burden on both the Employer and Contractor to follow these new administrative requirements. The global construction umbrella federation, CICA, and the three international contractors’ associations from Europe, Japan and Korea, EIC, ICAK and OCAJI, wrote an open letter dated 26 January 2017, calling upon FIDIC to maintain an equitable contractual standard.10 The open letter noted that:
“the proposed contract administration under the updated FIDIC standard will become highly bureaucratic and carry the risk that the parties are drawn into time consuming, costly and labour-intensive dispute settlement alongside the ongoing project.”
Dispute Resolution and Dispute Adjudication Boards
Again, as with FIDIC, there is an increased emphasis on dispute avoidance. The “Dispute Resolution” part of NEC3 has been renamed “Resolving and Avoiding Disputes” in NEC4. Under NEC3, there are two Dispute Resolution options, W1 and W2, one for use where the UK adjudication provisions, the Housing Grants, Construction and Regeneration Act 1996, apply, one for where they do not. Both provide for adjudication as a mandatory precondition to arbitration.
The NEC4 has introduced a new option of referral to senior representatives of the parties to the project. The idea is to provide for a four-week period for negotiation to see whether a more formal dispute can be avoided. This does not (and in the UK could not) affect the statutory right to refer a matter to adjudication at any time.
In addition, the NEC4 introduces a new option, W3, which provides for the use of Dispute Adjudication Boards (“DAB”). Only for use where the UK mandatory adjudication provisions do not apply, the proposed DAB is similar in form to the FIDIC DAB. Under Option W3, the NEC4 DAB will be a standing DAB, nominated by the parties at the time the contract is formed. The DAB will be encouraged to make site visits and so become familiar with the project at a time when there are no disputes. It will also be able to provide assistance and non-binding recommendations when disputes do arise.
It is, of course, too early to make any definitive conclusions on the new revisions.
However, the increased emphasis on dispute avoidance within both the FIDIC and NEC forms is something to be welcomed.
- 1. Obviously, this article is being written before the release of the FIDIC second edition. It is therefore based on the best available information, primarily the December 2016 pre-release Yellow Book
- 2. Simon Worley, December 2016, FIDIC Users’ Conference
- 3.  ZAKZDHC 3
- 4.  EWHC 3272 (TCC)
- 5. Contracts, Capacity Building and Business Practice
- 6.  33 BLR 103
- 7.  EWHC 319 (TCC).
- 8.  WASC 286.
- 9. Formerly clause 15
- 10. http://www.eic-federation.eu/news/joint-federation-letter-fidic/ [Accessed 27 September 2017]