Contractors are often reluctant to exercise dispute mechanisms available to them against Employers due to the paucity of projects and business opportunities in the industry. This reluctance is driven by the fear of damaging relationships with Employers and often leads to Contractors unknowingly forfeiting their rights to claim under the contract. This article aims to explore the ways in which Contractors who are parties to NEC contracts can protect their contractual rights while maintaining good professional relationships with their Employers.
The New Engineering Contracts (NEC) are a suite of contracts used in the construction and engineering industry to regulate the relationship between the Employer and the Contractor. NEC contracts are widely used to facilitate and implement project management principles and dispute resolution. The latest version is the NEC4 contract, although its predecessor, the NEC3, is still widely in use in South Africa.
The benefit of the NEC is that it provides a flexible and collaborative approach between the parties which aids active risk management throughout the procurement process. NEC actively aims to minimise disputes arising between parties primarily through its use of Early Warning Notices, Compensation Events and the project risk register.
Compensation Events
Core clause 60 of the NEC deals with compensation events. A compensation event refers to any event which can affect the cost to the Client of the work being carried out, the time expected for the work to be completed or both. A Contractor makes use of a compensation event as a mechanism to be compensated for any additional costs and time for dealing with unexpected changes in executing the work. The result is that this clause can often give rise to disputes, as claims for additional compensation are often contentious.
Clause 60.1 provides a list of different compensation events. It is imperative that a Contractor is familiar with this provision to notify the Employer in circumstance where such events occur. In terms of Clause 61, a Contractor should notify the Employer of a compensation event as soon as he/she becomes aware of it. Failure to notify the Employer of a compensation event within eight weeks of becoming aware of it may result in the Contractor being prohibited from claiming for additional costs incurred.
For instance, if a Contractor encounters unforeseen ground conditions that necessitate additional excavation work, they should promptly notify the Employer of this compensation event. The Contractor may claim additional costs for the unexpected work and request an extension of time to complete the project. Clause 60.1(19) is especially significant, because it introduces a fairly wide range of possible circumstances that could give rise to compensation that is arguably much wider than a standard force majeure clause.
Option W1 Clauses
Option W1.1, W1.2 and W1.3 provide respectively that should any dispute arise in respect of the contract, then that dispute is referred to and decided by an Adjudicator. The Adjudicator is appointed by the parties under the NEC Adjudicator’s Contract and must act independently and impartially when deciding disputes. Disputes are notified and referred to the Adjudicator in accordance with the Adjudication table. The Adjudication table sets out the manner and the applicable time restrictions in which various disputes may be referred to the adjudicator. Usually, a matter must be referred to the adjudicator between two and four weeks after notification of the dispute is issued to the other party. If a disputed matter is not notified or referred within the time limits set out in the contract, neither party may subsequently refer it to the Adjudicator or tribunal. Therefore, it is vital that parties are aware of the time limits set out in the contract so as to not forfeit any rights to claim.
The time limits provided for in the Adjudication Table are where so many claims are lost, because many expire within a period of four weeks, which can go by quickly when the parties are negotiating on an issue. Contractors will sometimes seek to hold back on formal dispute processes in order to keep negotiations amicable, and in doing so can irrevocable waive their rights to pursue the dispute if the time to notify or refer lapses during the negotiations.
Dispute Resolution
The standard form of the NEC3 Contract provides for a three-tier approach to dispute resolution. The first step is to declare a dispute, the second step is to refer the dispute to adjudication and if the dispute is still not resolved, then the last step to dispute resolution the parties may subsequently refer the dispute to arbitration.
A Middle Ground: Using A Without Prejudice Letter
Contractors who are concerned about the impact of exercising dispute resolution mechanisms on their relationship with the Employer may consider a subtler approach like sending a “without prejudice” letter. This letter serves as a means of providing a platform for a dialogue between the Contractor and Employer to settle a dispute or negotiate an amicable resolution while still protecting contractual rights.
A “without prejudice” letter is based on the principle that parties should be encouraged to settle disputes without going to adjudication, arbitration or court. It is considered privileged communication, which means that it is protected from disclosure to a third party. This means for example, that it cannot be used as evidence in court. However, merely stating “without prejudice” on the letter does not give this protection, rather the letter must contain a genuine offer of compromise that seeks to avoid the dispute.
Conclusion
The reluctance of Contractors to exercise dispute resolution mechanisms is understandable given the potential strain on relationships with Employers. However, failure to do so puts the Contractor at risk of loss of contractual rights, worsening costly project delays and ultimately lead to significant financial losses.
Understanding the relevant and applicable provisions in the NEC places Contractors in a better position to navigate contractual disputes and protect both their financial interests and professional relationships. Contractors are advised to carefully weigh the risks and benefits of the mechanisms available and to consult legal experts to guide them through the process when disputes arise.
By Tshepiso Mabena