The NEC4 and FIDIC approaches to dispute avoidance and dispute resolution compared

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The NEC4 and FIDIC approaches to dispute avoidance and dispute resolution compared

March, 2018
Jeremy Glover

The year 2017 saw the release of new editions of the FIDIC and NEC forms of contract. 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:

  • to stimulate good management;
  • to support the changing requirements of users; and
  • to improve clarity and simplicity.

The underlying philosophy behind the FIDIC update was similar, including a desire:

  • to enhance project management tools and mechanisms;
  • to achieve a balanced risk allocation; and
  • to achieve clarity, transparency and certainty.

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”. The same could not be said for the FIDIC Second Edition which is some 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. The NEC form has also adopted gender neutral drafting, something FIDIC followed. As with FIDIC, the NEC4 makes use of deeming provisions.  This is something to bear in mind carefully when operating the claims and dispute resolution provisions of both contracts.

Structure and format

There has been little change to the format. Both FIDIC and the NEC aim for standardisation. The 1999 Rainbow Suite contracts all have 20 clauses and there is a high degree of similarity across the suite. This has now increased to 21 clauses, the reason being to help make clear that making a Claim is not the same as a Dispute. To put forward a Claim is to make a request for an entitlement under the Contract. A Dispute arises if that Claim is rejected (in whole or in part) or ignored. As a result, clause 20 is now entitled “Employer’s and Contractor’s Claims”, whilst the heading of clause 21 is “Disputes and Arbitration”.

The foundations of the NEC form are the nine sections containing the core clauses. Beyond these, a user selects the appropriate main and secondary option clauses to produce the contract appropriate for the chosen procurement pathway. Finally, there are the Z-clauses, which provide the parties, more usually the Employer, with the opportunity to insert bespoke terms or amendments into the contract. None of this has changed.

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,1 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 disputes often arise because the parties have not understood what the contract and the contract conditions actually require of them.

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 whilst such an obligation is implied by most civil codes, the English courts will not do this.2 However, clause 10.1 of the NEC form does include an obligation to act in a spirit of mutual trust and cooperation. Of course, what the NEC form does not do, is provide a definition of what this might mean. 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.4 He noted with approval the Australian case of Automasters Australia PTY Ltd v Bruness PTY Ltd,4 which commented:

“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’.”

Early warning

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. Under the NEC4 scheme, for clarity the risk register has been renamed as the early warning register, and under clause 16, 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.

With FIDIC, whilst the 2016 pre-release Yellow Book said that the Employer, Contractor and Engineer should “endeavour to advise” each other in advance of any known or probable future events or circumstances which may adversely affect the work, that obligation has been tightened to simply “shall advise” under the 2017 Second Edition.

Claims and notices

FIDIC are clearly trying to move towards “real time” claims management. This is in line with the NEC approach and is 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.

FIDIC have made it clear that a notice given under the new contract must clearly state that it is a “Notice”. 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. The NEC3 form already did this.  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, a new sub-clause 20.2.5 does provide the Engineer 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. In contrast, the FIDIC form requires both the Employer and Contractor to submit claims as part of clause 20. This closer alignment of Parties’ claims is a key part of FIDIC’s attempts to achieve balance and reciprocity between the Parties.

The FIDIC approach is that if there is a clearly defined process, then that can help maintain relationships as both Parties will know exactly where they stand and why the other is taking the steps they are to submit their claim. That said, new sub-clause 20.2, which sets out the claims process, is one of the longest clauses in the Contract and sets out a detailed procedure. On one view, the length of the new sub-clause is a signal that the process may not be a simple and straightforward one to follow.

This will undoubtedly place an increased burden on both the Employer and Contractor as they follow these new administrative requirements. In fact, as a whole, there are more specified time limits within the revised Contract, the failure to follow which will lead to sanctions.

In January 2017, the global construction umbrella federation, CICA, and the three international contractors’ associations from Europe, Japan and Korea, EIC, ICAK and OCAJI, wrote an open letter5 dated 26 January 2017, noting 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.”

A criticism that has often been made of the NEC form.

Dispute Resolution and Dispute Adjudication Boards

In both contracts there is an increased emphasis on dispute avoidance. The traditional FIDIC Dispute Adjudication Board (DAB) has been renamed the Dispute Avoidance and Adjudication Board. The “Dispute Resolution” part of NEC3 has been renamed “Resolving and Avoiding Disputes” in NEC4 , which has retained Dispute Resolution options W1 and W2, one for use where the UK adjudication provisions, the Housing Grants, Construction and Regeneration Act 1996 (as amended), apply, and 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, like the FIDIC 84-day DAB decision-making process, could not) affect the statutory right to refer a matter to adjudication at any time.

In addition, the NEC4 has introduced a new option, W3, which provides for the use of DABs. 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.

Conclusion

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. It is to be hoped that over-time parties come to appreciate the benefits of a more collaborative approach. 

By Jeremy Glover, Partner, Fenwick Elliott

Notes

[1] [2016] ZAKZDHC 3.
[2] See for example, Does Good Faith Have Any Role in Construction Contracts, January 2018, a paper prepared for the SCL by Sir Rupert Jackson : https://www.scl.org.uk/papers/does-good-faith-have-any-role-construction...
[3] [2017] EWHC 319 (TCC).
[4] [2002] WASC 286.
[5] http://www.eic-federation.eu/news/joint-federation-letter-fidic/

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