Introduction
The purpose of this report based on NEC3 ECC contract is to provide sensible proficient advice. The Principal of the Heriot Watt University intends to build a £100 million Postgraduate Student Accommodation and Outreach Centre project in its Malaysia campus. The report provides advice on the following issues discussed below to the Principal.
The New Engineering Contract (NEC) is made up of the Engineering and Construction Contract (ECC) and, hence, the abbreviation NEC ECC. NEC ECC is a collection of standard form construction law contracts developed by the Institution of Civil Engineers (Hughes 2012). The provisions for the NEC ECC emanated from the Latham Report on contractual and procurement agreements in the UK construction industry. From the Report, the following strategies were recommended for adoption into construction contracts. First, the recommendations were to eradicate the combat method that was widespread in the UK construction industry. Second, it was meant to introduce a single contract document with all major elements of a contract. Finally, it was also meant to enhance productive management.
NEC3, the current version, is now widely applied in big construction projections and engineering works across the UK and globally. NEC3 has received endorsement from several institutions, including the Institute of Civil Engineers for application in every public sector development projects. Overall, these organizations have preferred NEC3 because of clarity and simplicity; stimulus to good management; and flexibility (Lewendon n.d).
The general principle of law governing construction contracts
Construction contract law offers the major principles that guide contract law based on construction contracts and engineering. Contract, based on a definition from the 19th century, is generally referred to as a promise that can be enforced or recognized by the law (Winfield 1950). That is, a contract involves reciprocity to perform a task between parties. Obligations and rights found in the contract are responsible for the formation of a contract to reflect an agreement between parties that enter into a contractual relationship.
A contract is known to undergo formation to make it an obligation and legally binding. Based on the UK common law, three critical elements have been recognized in contract formation. They include agreement, contractual intention and consideration. The most important aspect of a contract is an agreement that is initiated and accepted by both parties. An agreement results from an offer made by one of the parties and is acknowledged by another party. Only objective tests are used by courts to determine if parties had reached an agreement.
Offer and acceptance
An offer reflects an expression of readiness to agree to contract based on certain identified conditions created with the notion that the contract would be legally binding once another party accepts it. Both parties should demonstrate objectivity of intent when they consider an offer for acceptance.
It is imperative to observe that an offer is different from an invitation, and it can be done orally or in written form. The differentiating factor is the intent. An offer is considered binding once another party has expressed and communicated through assent to its contents and terms.
Acceptance is the final stage that involves unqualified acknowledgement of all the presented terms and conditions of an agreement. It also requires objective demonstration by the party receiving an offer. The party shows that it is ready to be legally bound by the terms of an offer. The parties must recognize that an offer requires the exact terms in order to be considered as an agreement. The receiving party must agree to all terms expressed.
Intention
For an agreement to be legally binding, parties to an agreement must demonstrate their plan to enter into a legal relationship. Thus, consideration alone is not adequate. This general principle shows that all parties to an agreement must demonstrate their willingness for a legal contractual relation.
Agreement on a similar matter
Parties to a contract must be referring to a similar issue. Some indirect terms could be constituents of an agreement. They are not categorically stated because of a party’s intent, the law, application or custom. Thus, the terms of the contract should be clear to allow both parties to agree about the same thing because they cannot enter into a contract when they disagree about it.
Legality of objects
Parties are expected to agree on object that is lawful to ensure validity of a contract. In an agreement, the parties must demonstrate that it is lawful to ensure its validity. Illegal agreements are considered void. Hence, it is necessary for the contract to identify illegal issues and considerations. When the consideration or object of an agreement is considered unlawful, then the parties must realize that it is illegal and thus void.
Possibility of performance
It should be possible for a party to complete an agreement. Legally binding agreements do not involve agreements that are impossible to perform. Hence, parties should only agree on contracts that can be completed. An impossible contract is not valid before a court.
Certainty of terms
All terms in an agreement should be adequately defined to make the contract legal and binding. Definition of terms allows parties and the court to comprehend obligations contained in the contract. It is the responsibility of a party to acknowledge an offer only when terms are certain. Thus, all parties must agree on materials terms for enforcement (Rameezdeen & Rodrigo 2014).
Consideration (English Law only)
Under the common law, a promise and contract are different. A consideration makes a contract binding, particularly where there is a deed. Hence, a ‘valuable thing’ is provided as a promise and is mandatory to ensure that the promise can be recognized and enforced as an agreement. In this case, the promisee must deliver that value while the promisor must get the value in turn. For instance, when the Principal makes a payment as a consideration for the contractors’ promise to construct the new building, the new building is a consideration for the Principal’s promise to pay. However, an informal unwarranted promise cannot constitute a contract (Gerber 2010).
Design an NEC3 ECC contract by selecting appropriate Main Options, Secondary Options and appropriate Z clauses to achieve this goal, including appropriate contract features
The Core Clauses of the Contract
General
The contract involves the construction of a £100 million Postgraduate Student Accommodation and Outreach Centre project in its Malaysia campus. The Principal (Employer) and the Project Manager (the Contractor) will have to agree on general terms of the contract, including communication, definition and interpretation.
Constructors’ Major Responsibilities
The Constructor is generally responsible for the provision of the project, design of the Outreach Center, workers and any other elements of subcontracting.
Time
The Project is expected to take approximately three years. It will commence on January 2016 and completed in December 2018. The Contractor must deliver specific aspects of the Project on key dates agreed upon with the Principal. The Project will be handed over to the Principal once it is completed.
Testing and Defects
Initial tests would involve the quality of materials to be used in the construction. Any substandard materials would not be allowed. During the construction period, the building will be tested for stress and any other defects that could affect its quality. The Project Manager is expected to accept and correct all defects identified.
Payment
The payment option is designed to minimize risks to the Project stakeholders. Payment for the Project will be considered with activity scheduled. That is, clearly identified discreet parts of the entire Project will have to be completed as noted in the Works Information before payment is made. It is the sole responsibility of the Contractor to identify quantities of the work required to attain a completion status for the identified activities.
The Contractor will receive a lump sum as the price for the completed activity. Every discreet detail of the activity must be present for the payment to be done. It is imperative to recognize that the Project Manager or Contractor will not receive any payment associated with the poor quantity of the required work. However, a provision will be made when there is an instruction to alter Works Information. Hence, the Constructor must identify and manage all possible risks. The aggregate sum of the Project would be obtained from the lump sum for every activity noted in the tender document prices.
Payment will be done in GBP (pounds sterling).
Compensation events
The Contractor would be paid upon successful completion of the activities on the schedule and the entire work. In case an event occurs, the Contractor would still receive compensation. In this regard, eighteen events will be evaluated.
They include changing the Works Information; possession of the site; provision by the employer; stopping work; work of the employer or others; reply to a communication; object of value or historic interest; change of decision; withholding an acceptance; and searching. Other events include delayed tests and inspections; physical conditions; adverse weather; employer’s risk event occurs; employer’s use of the works; materials and equipment for tests; assumptions about compensation events; and employer’s breach of contract.
These elements of compensation events will be defined clearly.
Title
The project title: Postgraduate Student Accommodation and Outreach Center Project
Risks and Insurance
The Project will define all risks for both the employer and the contractor. In addition, realistic insurance and indemnity limits will be shown.
Termination
The Project may be terminated based on inadequate funds and failure of the contractor to meet expectations as defined in Works Information.
Main Option Payment Methods
This option is chosen to allocate cost risk.
An Option A with activity schedule is considered. All activities defined in the Works Information will be used to determine compensation for every phase. The contractor will be responsible for work involved for every activity. The payment is lump sum for successfully completed activities while the total price of the Project will be derived from individual prices of each activity. Changes attributed to the Contractor will not be compensated. Thus, the employer has transferred critical risks to the contractor, which is a normal practice in construction.
Secondary Options
Option G reflecting performance bond and Option H will be used to allow the University to claim its monies if the contractor has failed to complete or if it goes into liquidation. The bond amount for guarantee will be written in the Contract.
Option L refers to Sectional Completion. The University may opt to use a section of the completed Outreach Center before the entire Project is complete.
Under Option K, multiple currencies, including GBP (pounds sterling) and Malaysian Ringgit (MYR) will be adopted.
Option Z would allow the University to introduce other conditions to the contract, specifically under the compensation events.
Dispute Resolution Option
This Project is based in Malaysia and, therefore the dispute resolution method adopted is W1.
The conditions guiding payment in the NEC 3 ECC conditions of contract
The chosen Option A for priced contract with activity schedule was meant to reduce risks. It acts as an incentive for the contractor to receive payment on the completion of the project activities based on the progress. The Option A will also help the University to avoid financial risks by transferring them to the contractor. The contractor has an obligation to finish the project within the tendered price. In addition, the Option would transfer other unforeseen risks to the contractor (Wright & Fergusson 2009). Hence, the contractor must work with the activity schedule and ensure accuracy throughout the work.
The first condition guiding payment is the assessment (Wright & Fergusson 2009). The contractor or the project manager will have to assess the progress of the project and identify related payments to the contractor based on the completed activities. The assessment should also identify potential deductions from the scheduled payment. The University and the contractor would agree on a given percentage such as 25 percent for failed submission. At the same time, retention will also apply to delay damages for incomplete activity based on the Works Information.
Regular assessments will follow the first assessment based on the Project Manager’s recommendations while frequencies will be guided by selected dates. A Defects Certificate will be issued. The assessment is meant to determine the Price for Work Done to Date, the amount to be paid to the contractor and the amount to be withheld from the contractor, as well as default periods.
The Project Manager will issue payment certificate within one week after the assessment.
The University will be responsible for the payment. It is required that University should pay within three weeks after the issuance of the certificate. However, both parties may choose the most appropriate date as defined in the Contract information.
In any case the University intends to withhold any payments from the contractor, the UK Construction Act clarifies that the University should provide a notification. It is imperative to note that NEC3 allows the University to change the contract. Hence, payment retention may be introduced under Option X16 (Maritz & Robertson 2012). It is required that the amount due for payment should be more for retention to be deducted. Any further retention should be agreed upon once the provided threshold is exceeded. The University is obliged to release half of the retention during take-over and later on release the rest in the final settlement.
The University will also make the final payment settlement when the project is complete. It is imperative to note that NEC3 ECC is flexible and, therefore, it does not account for a specific means of making the final payment. Hence, the standard methods of payment are applied based on assessment and payment certificates issued.
The contractual standing in terms of conditions governing contractual program
When all contractual standings in the contract are followed, then all parties should gain (Hide 2010). All these aspects of contractual standing are meant to ensure efficient management processes (Gerrard 2005).
At minimum, it is expected that contractual standing should contain vital elements of the contract. Contract commencement date, Contract Data showing how the contractor will perform activities and the intended date of completion. The governing contractual program may also stipulate additional information.
Both parties should recognize that a contractual program is not legally binding, and it is therefore not considered a legal contract document (NEC 2005). Hence, the contractual program would act as an indicative document to guide the contract activities and third parties, including consultants and suppliers to observe the project progress.
However, a contractor may decide to make the contractual program document a legally binding part of the contract. Thus, when there is a departure from the document, then a contractual program breach is assumed. Consequently, the wronged party may seek for compensation, but they must demonstrate that delays or extra costs have resulted from the breach.
The flexible nature of NEC3 allows the University to define specific dates of delivery and completing stages (Eggleston 2006). Thus, if the Principal of the University is concerned about the project activity stages and completion, then such provisions must be defined with precise dates contained in the contractual program under contract documents. Consequently, the University will have significant control over the project work progress processes. The Principal will specify important activities, prioritize work and compel the contractor to adopt the same approach. The contract will be aware of the Principal’s expectations before the project starts. At the same time, other third parties will also acknowledge such requirements on the contractual program.
It is imperative to note that the contract will clearly identify all elements of the contractual program that are legally binding (Creasey 2015). For instance, major dates of activities could be binding or all dates within the program are binding while other contents such as activity order and methods are obligatory to the contractor.
It is imperative to recognize that contractual standing is binding to both the University and the contractor. Hence, both parties must assume their respective responsibilities. The University is expected to provide all the necessary resources to complete the work based on the program (Pinsent Masons LLP 2013). In other words, the University will offer site access at the right time to allow the contractor to begin the project. However, if the University fails to offer the necessary requirements to facilitate the project, then the contractor may seek for compensation related to losses of money and income. A breach of the contract could even be caused by another contractor who has failed to complete on time and leave the site to another contractor. In this case, the employer is liable for the delay and therefore is in breach of the contract.
Contractual standing for contractual program can escalate claims and counter-claims because of the binding clauses they may have (Broome 2012). Hence, it is imperative to clarify timing and relevant details of activities to ensure compliance and avoid delays and subsequent claims and counter-claims. In addition, the employer must expressly facilitate the project execution to eliminate delays.
Dispute resolution methods in NEC 3 ECC contract
Disputes may arise in the course of contract execution. The JCT11 SBC/Q states that the contractor should provide contractual program to the administrator (Close 2011). As previously observed, a contractual program is not legally binding, unless a party decides to make it binding. However, the completion date is defined as binding and the contractor can work until the last moment to deliver the project (Seifert 2005).
The contract also provides for early warning for both parties to inform the other if they identify any issue that may influence cost, time and quality of the contract (Powell 2012). Once the issue has been raised, both parties must determine if it is relevant and decide how best to manage it to reduce negative impacts or minimize damages on the project (Rowlinson 2010). However, a party may fail to provide an early warning to the other party and a dispute may arise.
NEC3 applies two methods to dispute resolution. The parties may opt for adjudication as the initial step to resolve the dispute. However, if they fail to resolve the conflict at the adjudication, they may proceed to litigation or arbitration. In this case, Option W1 was chosen because the contract would be implemented in Malaysia, outside the UK. In this regard, NEC3 is touted as a global contract, which can work outside the UK, but it must work within rules of Malaysia, for instance (Sheridan & Marvin 2010).
The contractual program is a critical element of the NEC3 contract. Contract data may contain the program. Alternative, the contractor can create the contractual program and provide it within the stipulated time. Parties must appreciate the relevance of the contractual program because of its binding status demonstrated as when payment due is withheld until the contractor can complete the activity schedule. It provides the necessary information and defines the work the NEC3 contract. The program and the contract should always match in content and language as indicated in Works Information. However, one party may dismiss such a contractual program.
The contractor may opt to review the program and introduce more realistic goals and actual progress. The revised version could be accepted to both parties. However, if wording is unclear, the contract is ambiguous and there is evidence of departure from the Works Information descriptions, then the contract may not be legally binding and claims of contract breach are most likely to arise.
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