NEW ENGINEERING CONTRACT (NEC) 1993
AS RADICAL CHANGES TO THE
MALAYSIAN STANDARD FORMS OF CONTRACT
MELISSA CHAN YUET LI
UNIVERSITI TEKNOLOGI MALAYSIA
PSZ 19: 16 (Pind. 1/97)
UNIVERSITI TEKNOLOGI MALAYSIA
BORANG PENGESAHAN STATUS TESIS ♦
JUDUL: NEW ENGINEERING CONTRACT (NEC) 1993 AS RADICAL CHANGES
TO THE MALAYSIAN STANDARD FORMS OF CONTRACT
SESI PENGAJIAN : 2005 / 2006
Saya
MELISSA CHAN YUET LI___________________________
(HURUF BESAR)
mengaku membenarkan tesis (PSM / Sarjana / Doktor Falsafah)* ini disimpan di
Perpustakaan Universiti Teknologi Malaysia dengan syarat-syarat kegunaan seperti
berikut:
1. Tesis adalah hakmilik Universiti Teknologi Malaysia.
2. Perpustakaan Universiti Teknologi Malaysia dibenarkan membuat salinan untuk
tujuan pengajian sahaja.
3. Perpustakaan dibenarkan membuat salinan tesis ini sebagai bahan pertukaran
antara institusi pengajian tinggi.
4. ** Sila tandakan (9)
9
SULIT
(Mengandungi maklumat yang berdarjah
keselamatan atau kepentingan Malaysia seperti yang
termaktub di dalam AKTA RAHSIA RASMI 1972)
TERHAD
(Mengandungi maklumat TERHAD yand telah
Ditentukan oleh oprganisasi/ badan di mana
Penyelidikan dijalankana)
TIDAK TERHAD
Disahkan oleh
__________________________________________
(TANDATANGAN PENULIS)
Alamat Tetap:
49, Jalan Limau Kasturi,
Taman Kampar Jaya,
31900, Kampar, Perak.
Tarikh: ____________________
CATATAN:
__________________________________________________
(TANDATANGAN PENYELIA)
Assoc. Prof. Dr. Maizon Hashim
Nama Penyelia
Tarikh: ______________________
* Potong yang tidak berkenaan.
** Jika tesis ini SULIT atau TERHAD, sila lampirkan surat daripada pihak
berkuasa/organisasi berkenaan dengan menyatakan sekali sebab dan
tempoh tesis ini perlu dikelaskan sebagai SULIT atau TERHAD.
Š Tesis dimaksudkan sebagai tesis bagi Ijazah Doktor Falsafah dan
Sarjana secara penyelidikan, atau disertasi bagi pengajian secara kerja
kursus dan penyelidikan, atau Laporan Projek Sarjana Muda (PSM).
“We hereby declare that we have read this thesis and in our opinion this thesis is
sufficient in terms of scope and quality for the award of the degree of
Master of Science in Construction Contract Management.”
Signature
: .................................................................
Name of Supervisor I : .................................................................
Date
: .................................................................
Signature
: .................................................................
Name of Supervisor II : .................................................................
Date
: .................................................................
NEW ENGINEERING CONTRACT (NEC) 1993
AS RADICAL CHANGES TO THE
MALAYSIAN STANDARD FORMS OF CONTRACT
MELISSA CHAN YUET LI
A thesis submitted in fulfilment of the
requirements for the award of the degree of
Master of Science in Construction Contracts Management
Faculty of Built Environment
Universiti Teknologi Malaysia
JUNE, 2006
ii
DECLARATION
I declare that this thesis entitled “New Engineering Contract (NEC) 1993 as Radical
Changes to the Malaysian Standard Forms of Contract” is the result of my own
research except as cited in the references. The thesis has not been accepted for any
degree and is not concurrently submitted in candidature of any other degree.
Signature
: .................................................................
Name
: .................................................................
Date
: .................................................................
iii
To my parents for giving me such a good start,
and to my sisters for your love and the countless hours of laughter
and joy we shared throughout the years.
iv
ACKNOWLEDGEMENT
I wish to extend my sincere appreciation to everybody who contributed to the
accomplishment of this dissertation. My dissertation supervisor, Associate Professor
Dr. Maizon Hashim is specially remembered for her time, patience and efforts in
‘moulding’ me and my thought processes. The completion of this dissertation would
not have been possible without her conscientious guidance and encouragement.
I would also like to thank Encik Norazam Othman for his constructive
criticisms, as well as the re-direction of my thought and Encik Jamaludin Yaakob for
his general helpfulness. Remembered also is Associate Professor Dr. Rosli Abdul
Rashid for the lectures he gave on the subject of research methods.
In conducting the structured interview for the dissertation, I have incurred
intellectual debts to a few prominent professionals in the industry. In particular, I
wish to thank Mr. Lim Chong Fong, Encik Amran Majid, Mr. Jerry Sum Phoon Mun,
Mr. Low Khian Seng, Dr. Syed Alwee Alsagoff and Ir. Oon Chee Kheng for taking
their time out of their busy schedules in participating in this study. I am also indebted
to Ir. Oon Chee Kheng, for his generousity, to the extent of sharing some reading
materials and related articles for this dissertation.
Also, without the support of my parents, all my family members and my most
trusted friend Chin Mun, completing this study would not have been possible. My
wish is they all share my happiness. Not forgetting my buddy Wai Hoong, who has
been a companion during the arduous hours I spent on this dissertation. Last but not
least, special thanks goes to my sister, Grace. Her love, understanding and
encouragement have been a great help to the completion of my study. I dedicate this
thesis to her.
v
ABSTRACT
The construction industry in Malaysia has been plagued by the rising of
claims, disputes and litigation. Design and bidding documents are seldom adequately
complete prior to the tendering exercise. Hence, tender documents and conditions of
contracts were tinkered in an amateurish way loading substantial amount of risk on to
the Contractor. All these in turn, precipitated certain notable changes in attitude of
Contractors towards cost recovery and claims. The Malaysian Construction Industry
Development Board (CIDB) entrusted with the responsibility to address pertinent
issues and problems faced by the industry drafted and issued the CIDB Standard
Form of Contract for Building Works in year 2000. Prior to that, the Pertubuhan
Arkitek Malaysia (PAM) issued a revised Standard Form of Contract in year 1998 to
replace the old 1969 PAM Form that has been used for over 30 years by private
sector. Of late, for the purpose to meet the needs of the Malaysian construction
industry, the revised PAM Form of Contact 2006 is now at its final stage of drafting.
Stakeholders and constituents of the industry are seen to be of the opinion that
improved contracts or further tightened of clauses in a contract will better govern the
projects and control of disputes. In line with this development in Standard Forms of
Contracts in Malaysia, this research attempts to examine the possibility of
implementing the New Engineering Contract (NEC) 1993 issued under the sanction
of Institution of Civil Engineers (ICE), United Kingdom in the Malaysian
construction industry. This study however concluded that the industry is generally
not ready to embrace the NEC at this point of time. Nevertheless, the industry
showed encouraging response to certain aspects of the NEC such as “simple plain
language contract” and “adjudication” which could provide rooms for further
development in Malaysia.
vi
ABSTRAK
Industri pembinaan di Malaysia sedia ada dibelenggu dengan peningkatan
tuntutan pembinaan, pertikaian masalah dan litigasi. Rekabentuk dan dokumen
pembidaan jarang disempurnakan sepenuhnya sebelum pembidaan dilaksanakan.
Dengan demikian, dokumen tender dan syarat-syarat kontrak yang dirangka secara
kurang professional membebankan kontraktor dengan risiko yang berlebihan. Situasi
ini mengakibatkan perubahan sikap kontraktor ke arah tuntutan pembinaan. Dalam
menangani masalah tersebut, Lembaga Pembinaan Industri Pembinaan Malaysia
(CIDB) yang diamanahkan dengan tanggungjawab menghadapi isu-isu dalam
industri pembinaan telah merangka dan menerbitkan Borang Kontrak Setara CIDB
pada tahun 2000. Manakala sebelum itu, Pertubuhan Arkitek Malaysia (PAM) telah
mengemaskini Borang Kontrak Setara PAM pada tahun 1998 bagi menggantikan
Borang Kontrak Setara PAM 1969 yang telah digunakan lebih daripada 30 tahun
dalam industri pembinaan di Malaysia. Kebelakangan ini pula, Borang Kontrak
Setara PAM 2006 sedang diperkemaskinikan dan kini berada dalam tahap terakhir
pengemaskinian. Ada pendapat yang mengatakan bahawa kontrak yang diperbaiki
atau klausa-klausa kontrak yang diperketatkan mampu memberi lebih kawalan
terhadap projek pembinaan dan masalah-masalah pertikaian. Selaras dengan
perkembangan borang-borang kontrak setara di Malaysia, kajian ini cuba
menyelidiki kemungkinan penggunaan New Engineering Contract (NEC) 1993 yang
diterbitkan di bawah naungan Insititusi Jurutera Awam (ICE) di United Kingdom
dalam industri pembinaan Malaysia. Kajian ini bagaimanapun, menyimpulkan
bahawa industri pembinaan di Malaysia pada masa sekarang belum bersedia
menyerapkan penggunaan NEC. Namun begitu, industri pembinaan Malaysia
menunjukkan respon yang memberangsangkan terhadap beberapa aspek NEC.
Antaranya adalah “penggunaan bahasa yang jelas dan mudah” serta “adjudikasi”
yang mempunyai ruang untuk perkembangan dalam industri pembinaan.
vii
TABLE OF CONTENTS
CHAPTER
TITLE
PAGE
TITLE
i
DECLARATION
ii
DEDICATION
iii
ACKNOWLEDGEMENT
iv
ABSTRACT
v
ABSTRAK
vi
TABLE OF CONTENTS
vii
LIST OF CASES
xii
LIST OF FIGURES
xiv
LIST OF ABBREVIATIONS
xv
LIST OF APPENDICES
xvi
CHAPTER 1 INTRODUCTION
1.1
Background of Research
1
1.2
Problem Statement
5
1.3
Objective of the Research
8
1.4
Scope and Limitations of Research
8
1.5
Research Methodology
9
1.6
Significance of the Research
9
1.7
Organisation to Thesis
10
viii
CHAPTER 2 CRITIQUE OF TRADITIONAL FORMS AND THE NEED
FOR CHANGE
2.1
Introduction
13
2.2
Merits of Standard Forms of Contract
14
2.3
Demerits of Standard Forms of Contract
16
2.4
Critique of Traditional Forms of Contract
19
2.4.1
22
Length and Complexity
2.4.2 Language
22
2.4.3
Revisions
22
2.4.4 Lack of Interface
23
2.4.5
Amendments
23
2.4.6
Problems of Interpretation
25
2.5
The Need for Change
26
2.6
Conclusion
28
CHAPTER 3 THE DEVELOPMENT AND IMPLEMENTATION OF THE
NEW ENGINEERING CONTRACT
3.1
Introduction
30
3.2
Process of NEC Development
31
3.2.1 Institution of Civil Engineers
31
3.2.2
Martin Barnes Project Management
32
3.2.3
The Consultation Document
33
3.2.4
Constructing the Team
33
3.2.5
Latham and the NEC
35
3.3
NEC Implementation
36
3.3.1 Institution of Civil Engineers
36
3.3.2
37
Thomas Telford Limited
3.3.3 NEC Panel
37
3.3.4 NEC Users’ Group
37
ix
3.4
3.5
Status of NEC Implementation
38
3.4.1
Royal Hong Kong Jockey Club
38
3.4.2
ESKOM of South Africa
39
3.4.3
Channel Tunnel Rail Link
40
3.4.4
Other UK Projects
40
3.4.5 International Users
41
Conclusion
41
CHAPTER 4 NEW ENGINEERING CONTRACT PRINCIPLES
4.1
Introduction
42
4.2
The NEC Family of Contracts
43
4.2.1 Engineering and Construction Contract
(ECC)
4.2.2
Engineering and Construction Subcontract
(ECSC)
4.3
4.4
43
43
4.2.3 Professional Services Contract (PSC)
44
4.2.4 Adjudicator’s Contract (AC)
44
4.2.5
Short Contract (SC)
44
4.2.6
Partnering Agreement (PA)
44
Structure of the NEC
45
4.3.1
Nine (9) Core Clauses
45
4.3.2
Main Option Clauses
47
4.3.3 Secondary Options Clauses
49
NEC Objectives
53
4.4.1 Flexibility
53
4.4.2
Clarity and Simplicity
55
4.4.3
Stimulus to Good Management
58
4.4.4 Role Integration
60
4.4.5
61
Risk Allocation
4.4.6 Role of Co-operation at Law and NEC
62
4.4.7 Prevention
63
x
4.5
Salient Aspects of the NEC
64
4.5.1 Language
65
4.5.2
Mutual Trust and Co-operation
67
4.5.3
Supporting Materials –
Guidance Notes and Flowcharts
4.5.4
Employer to be the Core of the Process
(through Project Manager)
4.5.5
4.5.6
4.6
69
71
Separation of the Role of Designer
and Contract Administrator
72
Supervisor
73
4.5.7 Adjudicator
74
4.5.8
Early Warning Procedures
75
4.5.9
Accepted Programme
77
4.5.10 Work Acceleration
79
4.5.11 Compensation Events
80
4.5.12 Dispute Resolution
83
Conclusion
85
CHAPTER 5 POSSIBILITY OF THE IMPLEMENTATION OF NEC
IN MALAYSIA
5.1
Introduction
86
5.2
Sample Selection
87
5.3
Comments from Structured Interview
90
5.3.1
Language of a Contract Being
“Simple Plain English”
5.3.2
91
Acceptance towards the idea of
Adjudication as a form of ADR
93
5.3.3 Separation of Architect’s Role of
Designer cum Contract Administrator
5.3.4
95
Employer to be the Core of the
Construction Process
97
xi
5.3.5
Variation Order to be agreed prior to
works at site
5.3.6
99
Flexibility of a Standard Form of Contract
taking into account and responding to
ever-changing needs
5.3.7
5.3.8
5.4
100
Acceptance towards the CIDB
Standard Form of Contract 2000
102
Other Comments
103
Conclusion
105
CHAPTER 6 CONCLUSION AND RECOMMENDATIONS
6.1
Introduction
106
6.2
Research’s Overview
107
6.3
Methodology Accomplished
108
6.4
Research’s Findings
108
6.5
Research’s Constraints
110
6.6
Recommendations
110
6.7
Future Research
111
6.8
Conclusion
112
REFERENCES
113
APPENDICES
A
Letter Seeking Permission to Conduct Interview
120
B
Structured Questions
121
C
Matrix of the NEC “family” of Documents
125
D
Engineering and Construction Contract Main and
Secondary Options
126
E
Professional Services Contract Main & Secondary Options 129
F
Plant Contract Main and Secondary Options
130
xii
LIST OF CASES
CASE
PAGE
A E Farr Ltd v. The Admiralty [1953] 2 All ER 512, [1953] 1 WLR 965 ………..62
Amalgamated Building Contractors Ltd v. Waltham Holy Cross UDC [1952]
2 All ER 452 ………………………………...………………………………….…25
Aspdin v. Austin (1844) 5 QB 671 ………………………………………………...62
Balfour Beatty Civil Engineering Ltd. V Docklands Light Railways Ltd [1996] 78
BLR 4 ……………………………………………………………………………...24
Beaufort Development Ltd v Gilbert-Ash Ltd [1998] 2 All ER 778………………...24
Bickerton v. North West Metropolitan Regional Hospital Board [1969] 11 All ER
977 …………………………………………………………………..……………..21
Birmingham Association of Building Trades Employers Agreement [1963] 2 All ER
361 ………………………………………………………………………………....15
English Industrial Estates Corporationl v. George Wimpey & Co Ltd [1973]
1 Lloyd's Rep 118 ………………………………………………………………....21
Hamlyn & Co v Wood & Co. [1891] 2QB 488; [1891-94] All ER Rep 168, CA …67
Investors Compensation Scheme Ltd v West Bromwich Building Society [1998]
1 WLR 896, 912 (HL) …………………………………………………………….16
Jardine Engineering Corp Ltd & ORS v Shimizu Corp [1992] 2 HKC 89 (HC) ….67
MacKay v Dick [1881] 6 App Cas 251 at 263, HL ……………………….……….67
Matthew Hall Ortech Ltd v Tarmac Roadstone Ltd [1998] 87 BLR 96 ………….70
Paradine v Jane (1647) Aleyn 26, 82 ER 897, Style 47, 82 ER 519 ……………..15
Peak Construction (Liverpool) Ltd v. McKinney Foundations Ltd [1970] 1 BLR
111, CA ……………………………………………………………………………25
xiii
Photo Production Ltd v. Securicor Transport Ltd [1980] AC 827, [1980] 1 All ER
556, HL ……………………………………………………….…………………...61
Re Cadogan & Hans Place Estate Ltd, Ex p Willis (1895) 11 TLR 477, CA …….62
Stirling v. Maitland and Boyd [1864] 5 B & S (Eng) 840, 852 …………………...63
William Cory & Son Ltd v. London Corporation [1951] 2KB 476 at 484, [1951]
2 All ER 85 ……………………………………………….……………………….63
Williams v. Burrell (1845) 1 CB 402; 14 LICP 98; 135 ER 596 ……………...…..62
xiv
LIST OF FIGURES
FUGURE NO.
TITLE
PAGE
3.2.4
Principles of an Effective Contract
34
3.2.5
Seven (7) modifications of the NEC
35
4.5.11
Lists of Compensation Events
81
xv
LIST OF ABBREVIATIONS
AC
-
Adjudicator’s Contract
ACE
-
Association of Consulting Engineers
CCSJC
-
Conditions of Contract Standing Joint
Committee
CIDB
-
Construction Industry Board Malaysia
CIOB
-
Chartered Institute of Building, UK
ECC
-
Engineering and Construction Contract
ECSC
-
Engineering and Construction Subcontract
FCEC
-
Federation of Civil Engineering Contractors
FIDIC
-
Fèdèration Internationale des IngènieursConseils
HGCRA
-
Housing Grants, Construction and Regeneration
Act
ICE
-
Institute of Civil Engineering, UK
IFC
-
Intermediate Form of Contract
ISM
-
The Institution of Surveyors, Malaysia
JCT
-
Joint Contracts Tribunal, UK
NEC
-
New Engineering Contract
PAM
-
Pertubuhan Arkitek Malaysia
PA
-
Partnering Agreement
PSC
-
Professional Services Contract
PWD
-
Public Works Department
RIBA
-
Royal Institution of British Architects
RICS
-
Royal Institution of Chartered Surveyors
SC
-
Short Contract
xvi
LIST OF APPENDICES
APPENDIX
TITLE
PAGE
A
Letter Seeking Permission to Conduct Interview
120
B
Structured Questions
121
C
Matrix of the NEC “family” of Documents
125
D
Engineering and Construction Contract Main and
Secondary Options
E
F
126
Professional Services Contract Main and Secondary
Options
129
Plant Contract Main and Secondary Options
130
CHAPTER 1
INTRODUCTION
CHAPTER 1
INTRODUCTION
1.1
Background of Research
Professor John Uff QC wrote:-
“The growth and proliferation of construction contract forms are notable and
suggest an intention to achieve some objectives. The object is however,
rarely defined other than generality, usually consisting of a desire to
‘improve’ the operation of the form”. 1
This sentiment seems to be the forerunner of the ever increasing numbers of
contractual forms available. Building contracts some 30 years ago were all based
upon United Kingdom’s Joint Contracts Tribunal (JCT) Standard Form 1963, albeit
with amendments. On the other hand, Civil Engineering contracts were based on the
Institution of Civil Engineers (ICE) of Fèdèration Internationale des IngènieursConseils (FIDIC) Conditions. These are however something of many years ago.
1
Uff, John. (1989). Origins and Development of Construction Contracts. London : King’s College.
2
We are now faced with innumerable forms of contract and it’s release into the market
has become something of a fashion.
The rate of change is seen to be accelerated over the last 10 years. Some say
the contractors brought about the changes by their increasing readiness to make
claims. This emergence of claims has prompted the various institutions and
professional bodies to further tightened the contract conditions. Or could it be the
reverse trend where changes or tightening of contract conditions brought about the
new breed of claim conscious contractors?
On the evolution of contractual form, the first standard form of contract used
in the industry was the Royal Institute of British Architects (RIBA) Form first
published in 1870. This evolved further leading to the formation of the Joint
Contracts Tribunal. The JCT Forms were said to be direct descendants of the
original RIBA Form. 2 The development of local government in the late nineteenth
century led to each major local authority independently drawing up their own
conditions of contracts and changes were made periodically to remove any
ambiguities.
By early 1900’s, the Federation of Civil Engineering Contractors (FCEC) was
founded with intention of securing a model form of contract. It was not until 1930,
FCEC published a form with the Association of Consulting Engineers (ACE) though
it was not well accepted by the industry then. In 1945, together with the ICE, FCEC
releases ICE Form of Contract resembling very closely to the standard form issued in
1930. ICE Form of Contract has since published its sixth edition in year 1991. 3
2
Broome, J. C. (n.d.) A Comparison of the Clarity of Traditional Construction Contracts and of the
New Engineering Contracts. URL:http://lexinter.net/WEB7/ks-constr.html.
3
Norrie, C. M. (1956). Bridging the Years – A Short History of British Civil Engineering. London :
Edward Arnold Publishing Ltd.
3
Joint Contracts Tribunal meanwhile released the 1963 Joint Contracts
Tribunal Form (JCT 1963 Form) which PAM69 is closely modelled for building
works. The grossly defective JCT 1963 was formally retracted from the industry
when a JCT 1980 was issued in year 1980. Since then, the climate in United
Kingdom was clouded by the plethora of other standard forms of contracts and
subcontacts namely, Intermediate Form of Contract 84 (IFC 84), FIDIC Contract
(4th Edition) and not to mention the ICE Conditions of Contract (6th Edition) stated
earlier. 4
Malaysia too, was not spared from the trend of innumerable forms of contract
being release into the market. In 1998, under the sanction of Pertubuhan Arkitek
Malaysia (PAM) and Institution of Surveyors of Malaysia (ISM), PAM98 was
released to replace the old PAM69 which has been in use for the last 30 years. The
players of the industry was concerned about PAM98 as often than not, PAM98 is
used with much amendments.
In year 2000, CIDB Standard Form of Contract for Building Works was
drafted and issued by the Construction Industry Development Board (CIDB) as an
alternative to the newly issued PAM98. Of late, for the purpose to meet the needs of
the Malaysian construction industry, the revised PAM Form of Contact 2006 is now
at its final stage of drafting.
The tinkering of contracts was generally done in an amateurish way by non
legal professionals usually the Quantity Surveyors or by lawyers oblivious to the
practicalities of the construction process in responding to the employer’s demand in
private sectors. Contracts then become excessively complicated and confrontional
with opportunities for disputes at every turn.
4
Uff, John. (1991). Construction Law. London : Sweet & Maxwell.
4
The fact that a plethora of forms was seen worldwide and the recent issuance
of new standard form of contract in Malaysia to address long standing issues on
claims, disputes, arbitration and litigation provokes a mind boggling question to the
possible long term solution in Malaysia. At present, contract documents do little to
minimize adversarial thinking and provide too little incentive to avoid disputes. Most
often than not, these contract documents are left in the drawer untouched and only
surface when problems arises for finger pointing purposes.
On the other hand, professionals or stakeholders in the industry namely the
Architects, Engineers and Quantity Surveyors were seen trying to grapple with the
novel and unfamiliar conditions of numerous forms of contracts that ripple through
the industry. In addition, one of the circumstances of many standard forms also
appear to lack clearly defined design objectives and to disregard modern principles
of risk allocation and project management has been widespread criticism of standard
forms for failing to meet the needs of the construction industry. The introduction of
the New Engineering Contract (NEC) is said to be a specific response to this
criticism. 5
The NEC introduces a new systematic approach to contracting which is
multidisciplinary in nature and fully interlocked in form. Unlike traditional contracts,
the NEC attempts to achieve improvement in contractual relationships, managerial
practices and business values. 6 The NEC is intended by its supporters to be more
flexible and easier to use than any current leading traditional standard forms of
contract. The NEC drafters assert that these features reduce adversariality and
disputes. The NEC seeks to achieve this aim primarily through co-operative
management techniques and incentives built into the NEC's procedures. In brief, this
research undertakes to analyse and evaluate these and related claims of innovation.
5
McInnis, A. (2001). The New Engineering Contract: A Legal Commentary. London : Thomas
ford Ltd.
6
Potts, K. (1995). Major Construction Works : Contractual and Financial Management.
Tel-
5
1.2
Problem Statement
Malaysia is said to be something of a ‘contractual backwater’. It has been
operating based upon JCT conditions of contract save for the new CIDB Contract
released in year 2000. Though a revised form was published in year 1998 (PAM98),
PAM69 presence is still very much felt in the private sectors.
Due to the lack of standard forms available in Malaysia, tendency is such that
amendments are made to the general conditions on an ad-hoc basis drafted by
Quantity Surveyors lacking in legal expertise or by lawyers representing their client
lacking in knowledge about the complexities of construction industry. The conditions
are seen to be hastily modified and executed during a hurried tendering process. This
in turn led to much disputes and litigation. 7
Stakeholders in the industry also faced multinational company’s perdilection
to have it’s own
standard form of contract (be-spoke forms) in constructing
buildings in Malaysia. Analogue to other forms of contract, wordings found is
typically inscrutable legalese that tends to promote contradictions within clauses
leading to litigation. These multinational companies tend to have be-spoke forms that
is used worldwide having disregard to its suitability in the host countries buildings
are being built.
For those pursuing their rights within the legal framework, the dispute
resolution arrangement is somehow calculated. The industry depended upon the
limited and outdated Contracts Act 1950 where references were made to previous
court cases. This shall mean lenghty and expensive court cases.
7
Sundra Rajoo. (2005). Why Arbitration is Popular in the Construction Industry. Kuala Lumpur : The
Ingeniur, Vol. 25 March-May.
6
The PAM 69 Standard Form of Contract issued under the sanction of
Pertubuhan Arkitek Malaysia has been the de facto Standard Form of Contract used
by the private sector for the last 30 years for building contracts. 8 The PAM 69 is very
much modelled against the JCT 63 Conditions of Contract in United Kingdom which
is subjected to severe criticisms. Its inherit weaknessses led to many successful
monetary and time claims by the contractors against the employers.
In the usage of PAM 69, amendments were made to the clauses often by
Quantity Surveyors to address its shortcoming. In year 1998, PAM issued the PAM
98 Form ractifying some glaring defects found in PAM 69. Since its inception in year
1998, the industry expected a further revised PAM Form that is based on feedback
crystallised from the usage of PAM 98.
In 2005, Ar Chee Soo Teng reported that the draft of PAM Form of Contracts
2005 Edition has been forwarded to one of the largest law firms in Malaysia;
SKRINE & Co. for a legal overview. 9 The seminar on the PAM Form of Contract
2005 Edition was held in October 2005. Participants of the seminar were given 30
days to comment on the drafted PAM Form. 10 The revised PAM Form of Contact
2006 is now at its final stage of drafting and will be ready for publication shortly.
The Construction Industry Development Board (CIDB) meanwhile
established a Procurement Policy Committee in 1997 with the task of drafting
appropriate standard forms of contracts serving the various sub sectors in the
construction industry. The Procurement Policy Committee subsequently set up
various drafting committees under the chairmanship of various professional
institutions in the issuance of Standard Form of Building Contract, Standard Form of
8
Sundra Rajoo. (1999). The Malaysian Standard Form of Building Contract (the PAM 1998 Form),
2nd ed. Kuala Lumpur : Malayan Law Jounal Sdn. Bhd.
9
URL : http://www.pam.org.my/practice_projects0411.asp
10
Pertubuhan Arkitek Malaysia. Berita Arkitek. November/December 2005.
URL : http://www.pam.org.my/Library/BA_PDF/BA_Nov-Dec05.pdf
7
Civil Engineering Contract and Standard Form of Contract for Industrial Processes.
11
CIDB Standard Form of Building Contract issued in year 2000 is the first
time of the series of contracts to be published by CIDB. CIDB 2000 is seen to be a
Standard Form of Contract that is radically different from PAM or other forms of
contract. Notable differences between PAM 98 and CIDB 2000 are the attending of
Superintending Officer (SO) and provision option of part of the works to be designed
by the Contractor. CIDB 2000 is said to “streamline contractors by providing an
elaborate framework for the effective and efficient administration of the contract so
as to reduce uncertainties wth its associated costs and delays”. 12
It appears to be an inclination in Malaysia for Employer to elect for design
and build contracts in their developments. Other than the Public Works Department
(PWD) 13 Design and Build Contract, there is not other Standard Forms of Contract
in Malaysia that is drafted specifically for Design and Build works. 14 CIDB 2000
have such provision but it is limited to ‘part’ of the works. Due to this lacuna, the
FIDIC Orange Book appears to be the form popularly received.
In short, the evolution of standard forms of contract in building and
engineering has been haphazard. Over time, divergent aims and interests among
various constituencies that use standard forms have hampered systematic
development and design. Many standard forms also appear to lack clearly defined
design objectives and to disregard modern principles of risk allocation and project
management. 15
11
Ong See Lian et al. (2000). Guide on the CIDB Standard Form of Contract for Building Works.
Kuala Lumpur : Construction Industry Board of Malaysia
12
Wong, J. (2002). The CIDB Standard Form of Contract Poised to Dominate the Construction Industry? The Malaysian Surveyor, Vol 37.1, pp. 30-33.
13
Also known as Jabatan Kerja Raya (JKR)
14
Harban Singh K. S. (2004). Engineering and Construction Contracts Management : Law and Principles. Malaysia : Lexis Nexis Business Solutions.
15
McInnis, A. (2001). The New Engineering Contract: A Legal Commentary. London : Thomas
Telford Ltd.
8
1.3
Objective of Research
The objective of the research is to examine the possibility of implementing
the New Engineering Contract (NEC) 1993 issued under the sanction of Institution of
Civil Engineers (ICE), United Kingdom in the Malaysian construction industry.
1.4
Scope and Limitations of Research
It should be first emphasized that the observation made in this thesis are
based upon information available to date. Although NEC was introduced in the
United Kingdom back in 1993, Malaysia has never utilized this form of contract.
Therefore, to many in the industry, NEC is very much a new concept. Nevertheless,
this research attempts to look into both public and private sector in the Malaysian
construction industry.
As the research is concerned with examining the possibility of implementing
NEC in the Malaysian construction industry, a survey via structured interview is
conducted with highly prominent professionals within the construction industry as an
assessment of their perception of how far NEC’s concept is acceptable, which could
drive the possibility of implementing NEC in the Malaysian construction industry.
Due to time constraint, this survey could only afford a minimum sample covering all
professionals of the industry.
There is also a lack of reported cases in Malaysia due to the short legal
history of the NEC as little research material and other literature on the use of the
Form to draw from. There are in fact very limited usage and knowledge of NEC in
Malaysia. The de-facto forms used in the market have been the PAM 69, PAM 98
and PWD 203A. Thus, any possibility of lacking in knowledge on the existence of
NEC and clauses within is acknowledged.
9
1.5
Research Methodology
a.
Study on the New Engineering Contract (NEC) 1993 and related published
work relating to NEC for a strong understanding on NEC.
b.
Study on the Latham Report (a report by Sir Michael Latham endorsing the
NEC).
c.
Comprehensive study on write up, journals, and commentary to the
development and significance of the principles underlying preparation of the
NEC as well as the arguments in favour of and against them.
d.
Analyse and evaluate the background of NEC whether it improves upon the
traditional standard forms of contract.
e.
A survey via structured interview with highly prominent professionals within
the construction industry as an assessment of their perception of how far
NEC’s concept is acceptable, which could drive the possibility of
implementing NEC in the Malaysian construction industry
1.6
Significance of Research
There is an urgent need for research to study the response of industry towards
the recent issuance of standard forms of contracts in Malaysia. The research will take
a chance to investigate the industry to look into the importance of management of
contracts rather than legalistic contracts that do little to diffuse the augmenting
litigious nature of the industry. Though much was written on NEC on its success in
the implementation worldwide, no write-ups were found on its presence or rather it’s
usage in Malaysia.
10
This research also undertakes to examine the background to the NEC, its
design objectives, structure and its key features to determine whether it improves
upon the traditional standard forms of contract. Thus, this research is vital to
determine whether NEC does make a significant contribution to the development of
standard forms of contract, addresses many of their shortcomings and offers one of
the best models for their future design.
In essence, this research is expected to provide an analysis of the NEC’s
main tenets that is radically different in term of its style and structure from the
traditional forms of contract used in the construction industry specifically addressing
the problems of the industry. The research is then brought forward to the industry to
gauge its response to the possibility of trying out NEC. Hence, this study fills a void
that has not been studied.
1.7
Organisation to Thesis
This research covers six (6) segments as follows:-
1.7.1
Chapter 1 : Introduction
This segment introduces the foci of the research. An introduction to the
evolution of contractual form and the problems and challenges plaguing the
Malaysian construction industry particularly in regards of standard forms of contract
is discussed. The objective undertaken for this thesis is presented in Chapter 1. It also
presents the scope and limitations; significance of the research; as well as the
methodology and the outline of this research.
11
1.7.2
Chapter 2 : Critique of Traditional Forms and the Need to Change
A significant part of wide range of reports written in the construction industry
has dwelled upon the merits and demerits of the industry standard forms of contract.
This chapter outlines the criticisms in a number of respects of the traditional
standard forms of contract. It also undertakes a clear understanding of the need to
change in regards of the criticisms of the traditional forms of contract.
1.7.3
Chapter 3 : The Development and Implementation of the New
Engineering Contract
This chapter provides information on the New Engineering Contract (NEC).
It looks at how the NEC was created and implemented in the United
Kingdom (UK) as a response to the UK construction industry’s problems with
adversarial relations, claims, and litigation. Also, the chapter reviews the status of
the NEC’s implementation in the construction industry to date.
1.7.4
Chapter 4 : New Engineering Contract Principles
The NEC has spread its wing to numerous prestigious projects across the
globe. Its simplicity in language and setting enables it to serve as a multi-purpose
form of contract and was endorsed by Latham Report as a testament of good sense
and effective project management. This section explores the NEC family of
contracts, the structure and objectives of NEC as well as detailing salient aspects of
NEC.
12
1.7.5
Chapter 5 : Possibility of the Implementation of NEC in Malaysia
This segment carries an assessment of the industry’s perception of how far
the NEC’s concept is acceptable at this point of time, which could drive the
possibility of implementing the NEC in the Malaysian construction industry.
1.7.6
Chapter 6 : Conclusion and Recommendations
This chapter consolidating the research results and findings infers conclusions
from this study. This section also includes recommendations and suggestions for
future research.
CHAPTER 2
CRITIQUE OF TRADITIONAL FORMS AND
THE NEED FOR CHANGE
CHAPTER 2
CRITIQUE OF TRADITIONAL FORMS AND THE NEED FOR CHANGE
2.1
Introduction
Sir Michael Latham wrote:-
“It has been a depressing experience to re-read previous reports to the
Government, including those of Sir Harold Emmerson (1962) or the Banwell
Committee (1964). Many of the problems which they tackled still persist a
generation later. 16
The construction industry today may be understood through the wide range of
reports written during the last 50 or so years. 17 Very often these reports have referred
to themselves selectively and occasionally. The absence of an overview of the
myriad problems affecting the industry which has so often been touched upon in only
an ad hoc manner has persisted until very recently.
16
Latham, Sir Michael. (1994). Constructing the Team: Final Report of the Joint Review of
Procurement and Contractual Arrangements in the United Kingdom Construction Industry. London:
HMSO.
17
McInnis, A. (2001). The New Engineering Contract: A Legal Commentary. London : Thomas
Telford.
14
That is, however, until the publication of A Bridge to the Future. 18 This
report published under the authorship of Roger Flanagan, Ian Ingram and Laurence
Marsh, through the Reading Construction Forum, has now collated reviews of the
performance, procedures, practices, problems and opportunities presented during
these last five decades to provide a clear picture of their reappearance.
This chapter addresses the merits and demerits of the standard forms of
contract and outlines the criticisms in a number of respects of the traditional standard
forms of contract, primarily those of the JCT. It also undertakes a clear
understanding of the need to change in regards of the criticisms of the traditional
forms of contract.
2.2
Merits of Standard Forms of Contract
A significant part of many past reports has dwelled upon the merits and
demerits of industry standard forms of contract. The debate actually goes back much
further. Thus, Sir William McKenzie said:
It is my considered opinion that it is difficult to measure the advantages that
will flow from the general adoption of this Standard Form of Contract. The
elimination of uncertainties and ambiguities and the certainty introduced by
a standardization on fair and just lines in clear and simple language must
necessarily create confidence throughout the Building Industry; and I cannot
doubt will, by reason of equitable and known conditions, result in closer
prices and in reducing building costs. 19
18
Flanagan, Roger, et al. (1998). A Bridge to the Future. Profitable Construction for Tomorrow's
Industry and its Customers. London: Thomas Telford. Reading Construction Forum, Reading,
19
Close, Howard, A. (1952). The Evolution of the RIBA Form of Contract. London: NFBTE. p.11
15
Additional advantages have been held out to pertain to the reduction of
transaction costs and time savings, 20 serving as a sound practical basis for
negotiations in the best interests of all the parties 21 and ideally even the public,
according to Mocatta J. in Birmingham Association of Building Trades Employers
Agreement. 22 In short, the advantages of standard forms often resolve themselves
into questions of efficiency.
23
Standard forms of contract are able to address
important aspects of complex legal arrangements as well as providing the means to
correct unsatisfactory legal rules and industry practices. 24
Meanwhile Justin Sweet argues that standard forms are vital for three (3)
separate reasons in that they:-
•
provide a consensus as to allocating risks and responsibilities, remedies and
administrative practices;
•
make the negotiation process more efficient and less costly; and
•
are useful connector between different entities acting together on a project.
With standardization comes familiarity and familiarity is often held out as
advantageous. It is said that familiarity should make compliance with the form easier
and that previous court cases may aid in their interpretation. Lord Hoffman has
described interpretation to be “the ascertainment of the meaning which the document
would convey to a reasonable person having all the background knowledge which
20
Sweet, Justin. (1994) Judging Contracts: Some Reflections on the Third International
Construction Law Conference. International Construction Law Review.
21
Pike, Andrew. (1993). Preface to Practical Building Forms and Agreements. London: E & FN
Spon.
22
[1963] 2 All ER 361.
23
Cullen, Allen. Standard Conditions of Contract in the Building and Construction Industry.
Building and Construction Law, June 1993, 92-94 referring to the efficiency argument as put
forward and accepted by the Australian Trade Practices Commission in their consideration of
standard forms.
24
See Sweet, n. 20 above, 434 referring to Paradine v Jane (1647)
16
would reasonably have been available to the parties in the situation in which they
were at the time of the contract”. 25
However, familiarity as a perceived advantage favors existing over new
forms even when practice has shown that parties are adept at adjusting to a standard
form as it becomes more generally accepted. 26 It is probable that the extent of the
usage of forms has an important effect on norms within the industry as well. Todd D.
Rakoff, for example, has referred to the influence of the American Institute of
Architects standard forms contracts given the large number of sales of those forms
and their dominant place in American industry. 27
Similar arguments could be put forward based upon the past sale of JCT
forms. The position here is that new forms of contract, such as the NEC, are
influencing norms in new ways today.
2.3
Demerits of Standard Forms of Contract
In the absence of familiarity one of the most trenchant problems with respect
to standard forms of late has become the vast number of them in use. The result for
contractors is to have made it seemingly all but impossible to appreciate their
implications.
25
Lord Hoffman, Investors Compensation Scheme Ltd v West Bromwich Building Society [1998]
1 WLR 896, 912 (HL).
26
See Sweet, n. 20 above.
27
Rakoff, Todd D. Social Structure, Legal Structure, and Default Rules: A Comment. Southern
California Interdisciplinary Law Journal 3, 1993: p.25-26. See on the domination of JCT forms
of contract: Davis, Langdon and Everest. Contracts in Use: A Survey of Building Contracts in
Use During 1995. Construction Law Journal 3, 1997: p.297.
17
Clive Priestley has noted, for example, that the National Association of Lift
Contractors has encountered some 150 forms of contract.
28
Professor Max
Abrahamson has said that the situation resembles a “jungle”. 29
As a result of the proliferation of forms it has been stated that it is inevitable,
therefore, that many members of the industry are carrying out their duties with little
or no understanding of the main building contract and their role within the contract. 30
As long as ten years ago, there were already said to be over thirty “standard”
conditions of contract which reflected different allocations of risk. 31 Some would
argue we have reached a critical juncture.
The development of construction contract forms stands at a watershed: the
old forms are losing their influence; instead of orderly change, the existing
institutions are being outflanked by the introduction of new forms and new
systems; and the institutions are tending to respond by promoting more and
more diverse forms of their own. The volume of activity in the production of
standard forms is unprecedented. These facts demonstrate a clear need for a
collective body of learning on the subject of construction contracts which is
accessible and relevant; and an equally clear need for a considered appraisal
of the policies which might govern change. 32
28
Priestley, Clive. British Construction: In Pursuit of Excellence, a report to Sir Christopher
Foster, chairman of the Construction Industry Sector Group. (Business Round Table, London,
February 1994), p.45.
29
Abrahamson, M. W. et al. FIDIC Conditions of Contract for Work or Civil Engineering
Construction, Fourth Edition. Proceedings of the Institution of Civil Engineers 84, part 1,
August 1988, p. 821-836.
30
Building Britain 2001. Centre for Strategic Studies in Construction, University of Reading,
Reading, 1988, p. 24.
31
McGowan, Paul H. et al. Allocation and Evaluation of Risk in Construction Contracts,
Occasional Paper 52, ClOB, Ascot, 1992.
32
Uff, Professor John. Origin and Development of Construction Contracts. In Construction
Contract Policy. Improved Procedures and Practice. Centre of Construction Law and
Management, King’s College, London, 1989, p. 5.
18
It is also somewhat ironic that although many complain about the contents of
the JCT forms their familiarity is still seen as an advantage. It has been succinctly, if
cynically put by Andrew Pike who remarked “the great majority of the provisions of
the JCT forms are reasonable and acceptable, if somewhat incomprehensible”. 33 An
equally ambivalent endorsement is made by Ray Cecil who wrote:
The client will enter into the building contract on your advice. If anything is
wrong with that contract, the client will try to blame you. You might find
yourself spending days explaining the subtle nuances of JCT 80, but it is a
standard form and it is unlikely that you would be faulted for recommending
its use? 34
The same has been said about the leading American private forms, for
instance, the American Institute of Architect documents, and thus, even though there
are complaints about given forms, their familiarity is still seen as a positive factor. 35
However, this argument has been questioned and the benefits said to derive from the
fact that the JCT forms are, at least, in widespread use is, as Duncan Wallace has
noted, “a total non sequitur for while a standard form used as widely as possible is
obviously desirable, it is far better to have no standard form than a bad standard
form”. 36
Overall there is a very high level of dissatisfaction among clients in the
construction industry with existing standard forms of contract. In one recent survey
by Thompson, Cox and Anderson, it was suggested that only 6% of clients are fully
satisfied with existing standard forms of contract. 37
33
Pike, Andrew, Practical Building Forms and Agreements. E & FN Spon, London, 1993, p. 2.
Cesil, Ray. Risk Management for Architects. RIBA Indemnity Research, London, 1992, p. 17.
35
Sweet, Justin. Standard Construction Contracts: Some Advice to Construction Lawyers.
Construction Law Journal 7, 1991, p. 13.
36
Wallace QC, Professor I. N. Duncan. Construction Contracts: Principles and Policies in Tort
and Contract. Sweet & Maxwell, London, 1986, p. 502.
37
Thompson, I., Cox, A. and Anderson, I. Contracting Strategies in the Project Environment.
European Journal of Purchasing and Supply Management 4, March 1998.
34
19
2.4
Critique of Traditional Forms of Contract
Perceptions of drafting bodies and either their fairness or representativeness
are important. Seeking to be perceived in a positive way, a particular drafter may
pursue the endorsement of user groups. This was the approach that FIDIC once used
but has now forgone. With regard to the NEC the ICE seeks no endorsements, as it
believes that the value of the endorsements is outweighed by the costs at obtaining
them in terms of time and control.
However, Justin Sweet sees this affecting trust and confidence in the form. 38
The role of those involved in the process should thus be an important consideration
in determining what use, if any, should be made of a standard form. Thus, in
considering the standard forms, it is prudent to have regard to the standing of the
bodies under whose aegis the forms are sanctioned, recommended or issued. It is also
wise to consider whether or not the forms are agreed documents, and if so agreed by
whom and for whom.
Drafting bodies too may be remote from both practice and. users in industry.
In part this is the issue of how close the form should be to existing industry versus
practice where practice in industry should move. Professor John Uff QC has stated:
The process of developing an adequate framework of new contracting
systems should ideally be iterative and progressive. 39
This is a problem that existed in the first moves toward the standardization of
forms of contract
38
40
therefore, mechanisms need to be in place to see that a proper
Sweet, Justin, see n.20 above, p. 435.
Uff QC, Professor John, see n. 32 above, p. 10.
40
Close, Howard A. The Evolution of the RIBA Form of Contract. NFBTE, London, 1952, p.14
39
20
balance is struck. One means of achieving this is through consultation with the
prospective users and drafting bodies are increasingly using this tool. The drafters of
the NEC originally released a Consultation Document or test edition prior to
releasing the First Edition of the form. Likewise recently FIDIC released
consultation or test editions of their latest forms.
One of the most strident critics of standard forms and the JCT forms of
contract in particular is Professor I. N. Duncan Wallace QC. In texts and articles, as
well as from his authoritative position as editor of Hudson’s, Wallace has
unrelentingly and critically condemned both the specific content as well as
underlying policies behind them. In one damning critique of the 1963 RlBA form
Wallace sets out 19 ways in which he regards the form as defective and adds:
It must not be thought that the criticisms of the forms which I have made in
this article are exhaustive. A problem can be found in literally every line of
text of the RlBA forms. The real criticism to be made of the forms are their
almost total disregard for the reasonable commercial interest for the
employer, their unnecessary obscurity, and their immutability in the face of
criticisms 41 . . . They are of a length and complexity which renders them
wholly incomprehensible to the layman, and a trap even for a skilful
lawyer who has no previous experience in this field. 42
Although Wallace’s critique is made of the 1963 form he also notes that most
of the criticisms can equally be made with respect to the 1980 form as well.
43
Wallace also looks critically at the ICE 5th form in Hudson’s and Building
41
Wallace QC, Professor I. N. Duncan. n. 36 above, p. 521.
Wallace QC, Professor I. N. Duncan. n. 36 above, p. 521. Some of Professor Wallace's criticisms
are muted but not overcome in a paper by the late Donald Keating QC, delivered at King's College in
London on 21 February 1990 and published in modified form in the Alwyn Waters Memorial Lecture:
the Making of a Standard Form. Construction Law Journal 11, 1995, p. 175.
43
Wallace QC, Professor I. N. Duncan. n. 36 above, p. 538; and Construction Contracts: Principles
and Policies in Tort and Contract. Sweet and Maxwell, London, vol. 2.
42
21
Engineering Contracts 44 and although acquitting the form of “deviousness”, he still
finds much to criticize about the form.
Wallace takes his criticisms of the ICE form further in Construction
Contracts Principles and Policies in Tort and Contract
45
where Wallace has
updated and expanded upon some of these criticisms in relation to unmerited claims
for additional payments; inadequate defective work remedies; nominated subcontracts; delay and liquidated damages. 46 The high regard in which Wallace’s
opinions are held was lately underscored when the House of Lords paid tribute to his
contribution in shaping their views in the Beaufort Developments case. 47
These criticisms reappear again and again with respect to the JCT forms
including the views of judges. For example, Edmund Davies LJ in English Industrial
Estates Corporation v. George Wimpey & Co. Ltd. referring to “the farrago of
obscurities which go to make up the RIBA it contract”, or of Sachs LJ in Bickerton v
North West Metropolitan Regional Hospital Board saying it was “unnecessary,
amorphous and tortuous and lamentable that such a form....should be deviously
drafted with what in parts can only be a calculated lack of forthright clarity”.
Danckwerts LJ also speaking in Bickerton and saying that the form “has
produced problems which have given this Court, as well as other courts in the past,
difficulties of interpretation which defy the experienced intelligence of counsel
concerned with these matters, and even more the efforts of the courts concerned”. 48
44
Hudson’s Building and Engineering Contracts 11th edn. Sweet & Maxwell, London, 1994.
Construction Contracts: Principles and Policies in Tort and Contract, see n. 30 above, pp. 547-558.
46
Wallace QC, Professor I. N. Duncan. Appendix I - The Pre-Latham Contractual and Legal
Background. Following his article An Emperor without Clothes - Latham and the DOE. In
Contemporary Issues in Construction Law Vol II, Construction Contract Reform: A Plea for Sanity,
Uff QC, John. Construction Law Press, London, pp. 262-269.
47
Beaufort Developments (NI) Ltd v. Gilbert-Ash (NI) Ltd (1998) CILL: 1386.
48
Hudson’s, vol. 1, 338 citing Davies LJ in English Industrial Estates Corporationl v. George
Wimpey & Co Ltd [1973] 1 Lloyd's Rep 118 at 126; Sachs LJ in Bickerton v. North West Metropolitan
Regional Hospital Board [196911 All ER 977 at 989, CA and Danckwerts LJ at 996.
45
22
Criticisms of the traditional standard forms, primarily those of the JCT, may
be outlined in a number of respects as follows:-
2.4.1
Length and Complexity
Traditional contractual systems are being questioned and challenged owing to
the increase in the size and complexity of building projects; the increase in service
systems as a proportion of the project; the increase in major specialist contractors
who not only contract but also design intricate parts of the project; and the need for
fast-track building for commercial reasons. 49
2.4.2
Language
The proliferation of forms has been criticized in various terms and calls have
been made to supersede the existing JCT forms of contract and to introduce simpler
forms. Standard forms should be rationalized into a few key versions, with
provisions which are much more balanced and fair between the parties and are
written in plain English.
2.4.3
Revisions
Each time there is a drastic revision or even a simple one, prospective users
must study the new edition or revisions carefully to see whether it should be used and
if changes need to be made. These reviews are costly. Also court decisions which
interpret language of standardized contracts lose their precedent value if language
changes are made. Frequent revisions of standard contracts can also create distrust in
49
Priestley, Clive, n. 28 above, p. 45.
23
the competence of the entity that makes the standard contract. Failure to issue new
editions if there are drastic changes in practice or in law is a sign of
unresponsiveness. But generally frequent new editions are a sign of incompetent
preparation. 50
2.4.4
Lack of interface
In the introduction to the first volume of the then newly launched Building
Law Reports, the editor writes: “the form in use between main building contractors
and subcontractors is of entirely different authorship, and the two have not much
more in common than chalk and cheese”. 51 The JCT forms share little as a family
and thus one can point to a lack of interface across the main contract options.
2.4.5
Amendments
Admirable though they are, the basic trouble with Standard Forms is that they
never quite meet the unique situation of a particular contract. Consequently every
time the standard form does not suit a particular set of circumstances amendments
are made which in turn give employment to barristers in trying to interpret what was
meant. The issue of amendments to standard forms has proven particularly
contentious over time. Historically, and with reference to the early RIBA form,
contention existed not only regarding the substance of amendments but also the
procedures to agree upon them; first, with debate over the outcomes and then with
the procedures whereby the results would be achieved.
50
Sweet, Justin, n. 20 above, p. 431
At page vii in an editorial entitled The Standard Building Contract Forms referring to the JCT forms
of contract.
51
24
It also seems incongruous that while members of the JCT approve the forms
themselves, some members still recommend amendments on a universal basis in their
own constituencies’ interests. 52 Other concerns arising from heavily amended forms
pertain to exacting unfair commercial advantages when it has been alleged that some
amendments are attributable to parties capitalizing upon freedom of contract and
economically superior bargaining positions to exact unfair commercial advantages.
Whatever the reason for making the amendments, the resulting document can
be disastrous and often have the unintended result which the parties may never have
contemplated and the full contractual implications do not seem to be considered. For
example, in the case of Balfour Beatty Civil Engineering Ltd. V Docklands Light
Railways Ltd
53
where two major amendments were made to the standard ICE
Conditions of Contract 5th Edition; one substituting ‘Engineer” with “Employer’s
Representative” and the other removing the power of the Arbitrator to “open up,
review and revise” certificates. The question which arose was if the court had the
power to “open up, review and revise” certificates issued by the Employer’s
Representative. The court held that it had no such power.
54
The effective
consequence of the two amendments was that the certificates of the Employer’s
Representative became final and binding on both parties as neither the court nor the
arbitrator had the power to revise them.
Another consequence of making amendments to standard forms of contract is
that it makes the construction of the contracts a real nightmare. Inconsistencies
abound and the varying interpretations are a fertile source of disputes, and possibly
the consequence to the two contracting parties is that millions of ringgit may be at
stake. The Latham Report too recognized the pitfalls of unbridled amendments and
thus recommended the NEC that no amendments be permitted to the core clauses. 55
52
Klein, Rudi. Is JCT Up to the Job? Building, 29 March, 1996,36.
[1996] 78 BLR 4
54
It is to be noted that this decision was handed down before the landmark House of Lords’ decision
in Beaufort Development Ltd v Gilbert-Ash Ltd [1998] 2 All ER 778 which overrules Balfour Beatty.
55
Constructing the Team, Final Report of the Joint Review of Procurement and Contractual
Arrangements in the United Kingdom Construction Industry. HMSO, London, July 1994, the “Latham
Report”.
53
25
2.4.6
Problems of Interpretation
In Amalgamated Building Contractors Ltd v. Waltham Holy Cross UDC,
Denning LJ described the RlBA form as resembling a “legislative code” which gave
rise to interpretation problems as courts were generally precluded from considering
the intentions of the JCT drafters, most of which was unpublished in any event. In
Peak Construction (Liverpool) Ltd v. McKinney Foundations Ltd, Salmon JL also
indirectly criticized the form remarking:
Indeed, if a prize were to be offered for the form of building contract which
contained the most one-sided, obscurely and ineptly drafted clauses in the
United Kingdom, the claim of this contract could hardly be ignored, even if
the RlBA form of contract was amongst the competitors. 56
Meanwhile in Building Britain 2001, a report prepared by the Centre for
Strategic Studies in Construction at the University of Reading, the present situation
in terms of forms of contract in the United Kingdom was described as “confusing
and wasteful”. 57 Later, in the same report the authors stated: “The JCT Standard
Form (currently JCT 80) has undoubtedly led to much money and time being wasted
on mud-slinging and back-protecting within the building industry”. 58
More general criticisms point to the absence of accessible background
materials and clearly articulated drafting objectives. While many of these criticisms
are made with respect to the JCT forms, many of them are fundamental and thus can
equally be made with regard to other leading traditional forms such as those of the
ICE and FIDIC as well as those prepared by their counterparts in other jurisdictions.
56
Amalgamated Building Contractors Ltd v. Waltham Holy Cross UDC [1952] 2 All ER 452, CA.
Peak Construction (Liverpool) Ltd v. McKinney Foundations Ltd [1970] 1 BLR 111, CA
57
See n. 30 above, p. 23. Building Britain. 2001. Centre for Strategic Studies in Construction,
University of Reading, Reading, 1988, p. 24.
58
Ibid., p. 24.
26
The perceived shortcomings of the JCT forms reach far beyond Britain to
countries which have closely followed them in drafting their own local standard
forms. Thus, for example the late Professor Vincent Powell-Smith has written:-
The Asean region as a whole must, it is submitted, break free of the fetters
imposed by the standard forms of contract inherited from Europe and evolve
forms of its own. 59
It should be emphasized that these criticisms are not simply referring to
objections over the wording of, but far more basic qualities of the forms relating to
structure, philosophy and ease of use. Many of these fundamental criticisms actually
refer to the assumptions currently underlying these forms.
2.5
The Need For Change
The criticisms of the traditional forms of contract as well as a coincidence of
other factors drove the JCT and Conditions of Contract Standing Joint Committee
(CCSJC) to consider and offer new forms of contract and other procurement modes.
Richard F. Moore has looked at some of the factors that were both relevant and
served to precipitate this change. Moore, writing for the CIOB in Response to
Change - the Development of Non-traditional Forms of Contracting attributes the
pressure for change to several factors, notably: recession during the 1970s, client
dissatisfaction with project performance, and contractors seeking ways to improve
their positions. General contractors faced with unexpected falls in demand shed
directly employed labour and turned to specialist labour and plant suppliers. 60
59
Powell-Smith, Professor Vincent. (1992). An ASEAN Region Standard Form of Construction
Contract? International Construction Law Review. p. 384.
60
Moore, Richard F. (1984). Response to Change – the Development of Non-traditional Forms of
27
Those trends, as Moore notes, coupled with others, including the reluctance
of many firms to trim managerial staff, created ideal conditions for contractors both
to maintain and expand their market share through new managerial products and new
contractual arrangements. 61 It was inevitable that this would lead to a larger role in
the design of construction products up to and including new design and build forms.
It was thus a shift away from the dominant role the professions have held
historically shaping traditional forms of contract over time. To some within industry
the move is retrograde and when considered alongside the implementation of many
of the Latham Report proposals only serves to further marginalize the architectural
and civil engineering professions. 62
The JCT and CCSJC have been significantly discredited following the
Latham Report. Although their forms have been held out as consensus documents,
the absence of true client representation as well as the disproportionate influence the
RIBA enjoyed for many years considerably weakened their contract offerings.
Professor Phillip Capper made a similar point of highlighting industry challenges:
The challenge to the construction industry and its advisers is not so much the
NEC’s suitability as a contract (about which most expressed doubts are illfounded or exaggerated), but rather how effectively existing practices can
mould to the change of attitude and openness to new approaches that the
NEC demands. So many of the industry’s present participants have been
trained from their infancy in the particular practices of the ICE and JCT
forms that these have gained a significance beyond contractual provision. 63
Contracting. Ascot: CIOB. Occasional Paper 31.
61
Ibid.
63
Capper, Professor Philip. A Lawyer’s View. In Launch Seminar on The New Engineering Contract
Launch 2nd Editions: Proceedings of a conference in London on 3 October 1995 by the Institution of
Civil Engineers. Thomas Telford, London. 1995.
28
2.6
Conclusion
In conclusion, the traditional forms of contract in use today perpetuate a
legacy of construction problems. 64 The reliance upon nineteenth century commercial
precedents in particular “leases but without regard to the problems and situations on
a building site and situations on a building sites with which, of course, the building
contracts should have been concerned to deal” 65 has exacerbated the problem as
well as further removed the traditional forms from industry’s present needs.
If one were tempted to forgive shortcomings in the drafting of building
contracts, on the ground that Wallace’s revelation is of recent origin then perhaps the
views of Alfred A. Hudson writing closer to the time may give pause. In 1891,
Hudson opined:-
The building contract is often drawn by the engineer or architect himself, or
rather, it is a contract made up by him of traditional, and often inconsistent
and mutually destructive stipulations, in use by some person on whom he
relies, or consists of conditions of various kinds which seem to have been
handed down for years, often put together by the engineer or architect in
various combinations, producing various legal results, of more beneficial
interest to the lawyer than to the building owner. 66
64
See Uff QC, Professor John. The Place of Law and the Role of Construction. The Centre of
Construction Law and Project Management Lecture: delivered to the Society of Construction Law on
4 October 1988. London: 1988, p.3-4
65
Hudson’s vol. 1, 462.
66
Hudson, Alfred A. (1891). The Law of Building and Engineering Contracts and of the Duties and
Liabilities of Engineers, Architects and Valuers: With an Appendix of Precedents and an Appendix of
Unreported Cases. London: Waterlow and Sons. Rimmer, E. J. The Conditions of Engineering
Contracts. ICE Journal, February 1939, Paper 5203, also uses the word “peculiarities” to refer to a
range of circumstances that differentiate engineering contracts from other contracts.
29
The final word on the historical record comes lately from the Reading Construction
Forum which remarked that:
Two things are especially striking about the past 800 years of building
history. The first is that at no time has there been widespread use of a single
or a standard method of procuring buildings; time and again people have
tried new ways as a result of their dissatisfaction with previous methods.
The second is how little the problems have changed over the years, and how
regularly the same ones crop up. 67
67
Flanagan, Roger et al., see n. 18 above, p. 13.
CHAPTER 3
THE DEVELOPMENT AND IMPLEMENTATION
OF THE NEW ENGINEERING CONTRACT
CHAPTER 3
THE DEVELOPMENT AND IMPLEMENTATION OF THE
NEW ENGINEERING CONTRACT
3.1
Introduction
Professor John Uff QC wrote:-
“At the heart of the NEC is a new creed that Project Management techniques
can be successfully written into a main contract to produce more
co-operation, more efficiency and fewer disputes. There is also, of course, the
implicit assumption that the terms of the contract can affect the way in which
the contractor performs the work. The boldness of the new approach cannot
be overstated.” 70
Early 1990s were seen as a terrible time for the construction industry in
United Kingdom. The plethora of standard forms of contract was not able to contain
a wide spread of litigation cases on contractual disputes over the last decade.
70
Uff, Professor John QC. (1991). Figaro on ICE – the ICE 6th Edition and the New Engineering
Contract. Construction Industry Law Letter.
31
Although arbitration and other alternative dispute resolution surfaces to help diffuse
the litigious industry, these were to be treating the symptoms where as what the
industry need at that point of time was an effective standard form of contract that
treats the cause of the illness.
The proliferation of construction forms in United Kingdom has not been able
to ameliorate an already desperate situation. A bold move was taken by ICE namely
the New Engineering Contract (NEC) in year 1993.
This chapter explores the
development and implementation of NEC as well as its impact and successes.
3.2
Process of NEC Development
In the UK, some construction industry stakeholders and constituents are of
the opinion that improved contracts will better govern the management of
projects
and control disputes. The New Engineering Contract (NEC) is
recommended for use in the construction industry, as a unique and necessary
basis which to improve contractual relations in engineering and construction
project. The background to the NEC began formally in 1985. This section studies
the history and philosophy behind the development of the NEC process :-
3.2.1
Institution of Civil Engineers
It was during 1985 that the Council of the Institution of Civil Engineers
approved the following recommendation from the Legal Affairs Committee: “to lead
a fundamental review of alternative contract strategies for civil engineering design
32
and construction with the objective of identifying the needs for good practice”.71 The
recommendation reveals much about the ICE’s thinking at the time and ultimately, in
a comparison to the NEC system that resulted, how far they moved and the
leadership role that evolved.
Professor John Uff QC has pointed out one of the essential differences
between the two forms whereby the ICE conditions of contract proceed on the basis
that each side looks to its own interest. The NEC seeks to focus the interest of both
parties on the project. If this is successful it will have been a remarkable
achievement. Professor Uff has also written: The ICE has presented users with a
remarkable range of choice between well-tried tradition and undiluted radicalism. 72
3.2.2
Martin Barnes Project Management
At the persistence of Dr. Martin Barnes, a leading Project Manager, Fellow
of the Council of Institution of Civil Engineers (ICE), and founder and chairman
of the US’s Association of Project Managers, the ICE requested its Legal Affairs
Committee review best practice strategies of alternative contracts. Subsequently,
under the persuasion and inspiration of Barnes, the ICE legal affairs committee
commissioned work to begin on the development of an alternative contract for civil
engineering design and construction projects. With the assistance and collaboration
of Professor John Perry, Head of the Civil Engineering Department of the
University of Birmingham, Barnes, starting with “a blank piece of paper”, authored
the original specifications for the New Engineering Contract (NEC).
71
Guidance notes, First Edition, 1.
Uff QC, John. (1991). Figaro on ICE - the ICE 6th Edition and the New Engineering Contract.
Construction Industry Law Letter. p.653, 654.
72
33
3.2.3
The Consultation Document
In January 1991, the consultative version of the NEC was completed and
released to the construction industries of the UK, Africa, Hong Kong, and South
America for use and review. It was also sent out for review to members of the ICE,
Contractors, Engineers and various construction participants such as surveyors,
suppliers, and lawyers. This version was issued to solicit comments, objections, and
advice on the new alternative general conditions of contract. Thereby, the
construction industry was able to contribute extensive feedback that was received,
investigated, and required changes to be made to the developing document.
3.2.4
Constructing the Team
In July 1994, Sir Michael Latham issued a historic report called Constructing
the Team
73
commonly referred as the Latham Report, stating that the NEC should
be adopted in both private and public sectors and should become the national
standard contract for the UK. Latham also believes that “widespread use of the
NEC will reduce the number of disputes in the engineering and construction
industry”.
In the report, which was funded by industry and government, Sir Michael
Latham gave his support to the NEC approach in strong terms in two ways. First,
Latham identifying thirteen (13) principles, which should be included in an
“effective form of contract in modern conditions” as follows:- 74
73
Final Report of the Joint Review of Procurement and Contractual Arrangements in the United
Kingdom Construction Industry. HMSO, London, July 1994
74
Latham Report, paragraphs 5.18, 37.
34
The most effective form of contract in modern conditions should include:1.
A specific duty for all parties to deal fairly with each other, and with their
subcontractors, specialists and suppliers, in an atmosphere of mutual co-operation.
2.
Firm duties of teamwork, with shared financial motivation to pursue those objectives.
These should involve a general presumption to achieve “win-win” solutions to
problems which may arise during the course of the project.
3.
A wholly interrelated package of documents which clearly defines the roles and duties
of all involved, and which is suitable for all types of project and for any procurement
route.
4.
Easily comprehensible language and with guidance notes attached.
5.
Separation of the roles of contract administrator, project or lead manager and
adjudicator. The project or lead manager should be clearly defined as client's
representative.
6.
A choice of allocation of risks, to be decided as appropriate to each project but then
allocated to the party best able to manage, estimate and carry the risk.
7.
Taking all reasonable steps to avoid changes to pre-planned works information. But,
where variations do occur, they should be priced in advance, with provision for
independent adjudication if agreement cannot be reached.
8.
Express provision for assessing interim payments by methods other than monthly
valuation, i.e. milestones, activity schedules or payment schedules. Such
arrangements must also be reflected in the related subcontract documentation. The
eventual aim should be to phase out the traditional system of monthly measurement or
re-measurement but meanwhile provision should still be made for it.
9.
Clearly setting out the period within which interim payments must be made to all
participants in the process, failing which they will have an automatic right to
compensation, involving payment of interest at a sufficiently heavy rate to deter slow
payment.
10.
Providing for secure trust fund routes of payment.
11. While taking all possible steps to avoid conflict on site, providing for speedy dispute
resolution if any conflict arises, by a predetermined impartial adjudicator/expert.
12. Providing for incentives for exceptional performance
13. Making provision where appropriate for advance mobilization payments (if necessary,
bonded) to contractors and subcontractors, including payments in respect of off-site
prefabricated materials provided by part of the construction team.
Table 3.2.4 : Principles of an Effective Contract
35
Secondly, Latham noted that the NEC respected almost all of these
assumptions. He then set out what alterations were required to bring the NEC fully
into line with them. 75 It is submitted that this endorsement has already had an
influence on the overall acceptability of the NEC.
3.2.5 Latham and the NEC
Sir Michael Latham then concluded that the NEC “contains virtually all
of these assumptions of best practice” and suggested seven (7) amendments to
map against the 13 desired principles.
76
The seven (7) modifications of the NEC
suggested by the Latham Report are as follows:-
1.
Seven (7) modifications of the NEC suggested by the Latham Report:A change in the name of the NEC to the ‘New Construction Contract’ because it can
be equally used for building projects.
2.
A provision of a secure trust fund as a core clause to provide greater confidence for
Contractors and Subcontractors.
3.
A review the payment periods, especially to Subcontractors
4.
A statement within the NEC on fairness, mutual trust and co-operation between the
parties involved.
5.
An express provision to that none of the core clause can be amended and that the use
of the NEC subcontract is mandatory.
6.
A full matrix of consultants’ and adjudicators’ terms of appointment should be
published.
7.
A simpler and shorter minor works document.
Table 3.2.5 : Seven (7) modifications of the NEC
75
Latham Report, paragraphs 5.20, 39-40. 69 Since the Report of the Committee on Placing and
Management of Contracts for Building and Civil Engineering Work. HMSO, London, 1964, or the
'Banwell Report'.
76
Final Report of the Joint Review of Procurement and Contractual Arrangements in the United
Kingdom Construction Industry. HMSO, London, July 1994
36
3.3
NEC Implementation
This section looks at institutions and organizations endorsing and supporting
the implementation and effectiveness of the NEC in the engineering and
construction industry. The main groups discussed are as follows:-
a)
Institution of Civil Engineers
b)
Thomas Telford Limited
c)
NEC Panel
d)
NEC Users’ Group
3.3.1
Institution of Civil Engineers
Appropriately, the implementation of the NEC was pioneered by the ICE.
The ICE was up to the challenge of introducing a new and revolutionary
approach
to contracting. With
the
support
of
the
ICE
and
numerous
construction industry constituents and stakeholders, the impact of the NEC in
engineering and construction enterprises is growing.
The growth in use and acceptance of the NEC was endorsed by the
publication of the historic Latham Report. Considered the most thorough analysis of
the UK construction industry, the report sets the standards for an effective contract.
Based on those criteria, the NEC is an overdue remedy for the apparent ills of the
engineering and construction industry. 77 To “spread the fire”, many entities provide
support and administration for the NEC “family” of contract documents.
77
Final Report of the Joint Review of Procurement and Contractual Arrangements in the United
Kingdom Construction Industry. HMSO, London, July 1994
37
3.3.2 Thomas Telford Limited
On behalf of the ICE, Thomas Telford Limited (Telford) provides
administrative support for the NEC such as training, publication and sale of NEC
Contracts, publication and sale of books related to NEC, talks and seminars on NEC.
Telford is owned by the ICE and functions as its commercial branch. It is managed
by a Board of Directors appointed by the ICE. Telford’s fundamental purposes are
to serve the needs and to facilitate advancements in the engineering and
construction profession throughout the United Kingdom.
3.3.3
NEC Panel
The ICE’s official advisory committee for the NEC is the NEC Panel. The
NEC Panel is composed of senior members of the construction industry. Many
of the Panel members were on the original NEC drafting team. Their primary task is
to continuously review the existing documents in response to users’ needs and
comments, and changing legislation. To advance their objectives, the NEC Panel
meets on a regular basis to study suggestions for new additions and improvements.
3.3.4 NEC Users’ Group
NEC Users’ Group 78 comprises of users and potential users of the NEC
Contracts. It provides a platform for users to exchange views and opinions. The
78
Thomas Telford Limited. (1997). URL: http://www.t-telford.co.uk/Nec/nechome.html. Thomas
Telford Electronic Publishing Services.
38
Users’ Group exists for people and organizations that are interested in learning
about, participating in, and supporting the development and success of the NEC.
The aims of the Users’ Group are to offer guidance on the practical applications of
the NEC, disseminate information about NEC and to bring NEC users together.
3.4
Status of NEC Implementation
With all the support and effort in the creation and implementation of the
NEC, the worldwide interest in this new approach to the procurement and
management of projects is growing as evident. There is positive response from
participants and constituents of the construction sector to the endeavors of the NEC
to lead to less confrontation and better project management. 79 This section gives
insight into some of the successful implementations of the NEC by describing a few
of the notable projects and users to engage the contract documents:-
3.4.1
Royal Hong Kong Jockey Club
The vanguard of NEC users is the Royal Hong Kong Jockey Club which has
been using the NEC since 1993. Their first NEC project valued at HK$30 million, a
36-hole golf course. Because of a time constraint, this project was contracted out
without prior agreement of the cost. The Project Manager of the project reported that
“the contractor worked in good faith for example, in one place he found unexpected
rock, the quantity of which was unknown and rates were agreed without delay.”
79
Thompson, Roxene. (1998). Efforts to Manage Disputes in the Construction Industry : A
Comparison of the New Engineering Contract and the Dispute Review Board. Virginia Polytechnic
Institute and State University : Virginia
39
Afterwards, the same contractor was awarded another HK$30 million project
to build a racecourse that was let as a compensation event to extend the first contract.
Under the NEC, the Jockey Club has built seven stables, a training track and a golf
course. All in all, they have used the contracting system for both civil and building
works, major redevelopment, and demolition work. 80
3.4.2
ESKOM of South Africa
One of the largest user of the NEC is considered to be ESKOM.
ESKOM is South Africa’s national electricity supply utility company and the fifth
largest electric company in the world. At the time NEC was being drafted, ESKOM
was also working on its own new form of contract. Coincidentally, many of the
same objectives as those of the NEC were being considered. After hearing of Barnes’
initiatives and the ICE’s support, the Management Board of ESKOM appointed its
Corporate Contracts Consultant, Andrew Baird, to investigate the new contract.
Subsequently, Baird became an integral participant of NEC’s development by
joining the original drafting team led by Barnes. Ultimately, ESKOM Board selected
the NEC as the most satisfactory contract. Since 1992, ESKOM has used the NEC
on thousands of contracts, mainly in connection with electrification and power
plant construction. ESKOM has vast experience with the NEC. Since 1993, ESKOM
has used the NEC system of contracts on 100% of its work. 81
80
“NEC in Hong Kong.” (1996). The New Engineering Contract Users’ Group Newsletter.
Thomas Telford Limited. London, England, Issue 6, 2.
81
Bell, R. (1995). “ESKOM” The New Engineering Contract Users’ Group Newsletter. Thomas
Telford Limited. London, England, Issue 3, 4.
40
3.4.3
Channel Tunnel Rail Link
Most notably, the NEC is used on the £30 billion Channel Tunnel Rail Link
Project. The use of the NEC for this prestigious project is of international interest.
The project scope is to build a 68-mile long high-speed rail link between London
and the Channel Tunnel. The Channel Tunnel Rail Link is being built by
London & Continental Railways Limited through its subsidiary Union Railways
Limited. Mike Attridge, the Senior Contracts Manager for Union Railways, justifies
the choice of using the NEC documents by stating that “it will be very important to
use an approach to managing all the different interfaces and to use a system, which
stimulates collaborative problem solving”. 82
3.4.4
Other UK Projects
In the UK, British Airport Authority (BAA) is one of the biggest users of the
NEC. In 1996, David Williams, Construction Director of BAA, reported that “BAA
has used the NEC for more than 40 contracts, ranging in value from £60,000
to £50 million in Britain alone”. 83 In like manner, Anglian Water’s senior engineer,
Paul Glass declared that the NEC had been used successfully over 20 projects
worth between £500,000 and £2 million, and the work ranged from sewage treatment
works to laying pipelines. 84 As well as Anglian Water’s, Union Railways has
successfully employed the NEC system of contracting on its £60 million
Heathrow Express Tunnel project.
82
Hughes, K. (1997). “The Channel Tunnel Rail Link.” The New Engineering Contract Users’
Group Newsletter. Thomas Telford Limited. London, England, Issue 9, 3-4.
83
Giles, D. M. (1996). “The New Engineering Contract Ð A New Family of Contracts for a
New Millennium.” Anglo- American Chapter of the National Contracts Management Association
Newsletter, London, England, June, 1-4.
84
Barrie, G. (1995). “Private firms embrace NEC for construction.” Building. London, England,
December.
41
3.4.5
International Users
As stated earlier, worldwide interest in this new approach to contracting and
management of projects has been tremendous. Major Clients, such as the
Government of New South Wales, the Asian Development Bank, Scottish HydroElectric and the British Government’s Overseas Development Agency continue to
initiate use of NEC contract documents on their major projects. With large respected
Clients in the forefront and positive responses from Contractors, continued
increasing use and success of the NEC system of contracts are inevitable.
3.5
Conclusion
Adversity, extensive delays, and rising litigious activities and costs plague the
construction industry. With his expertise, Barnes convinced leaders in the
construction industry and the Institution of Civil Engineers in the UK that innovative
and non-adversarial conditions of contracts, aimed at better management of projects,
are the cure for the disease afflicting the construction industry. The product of these
innovations is the New Engineering Contract (NEC). In addition, the Latham Report
spearheaded the support for the ingenuity and effectiveness of the NEC.
Since the release of the consultative version in 1991, the NEC has rapidly
increased its use in the UK and around the world. It is used on a wide variety of
engineering and construction works. As a modern and innovative contracting system,
the NEC attempts to eliminate the time and effort which is very often arising as
a result of poor management and unfair contracts expended on disputes and
litigation. The founders of the NEC believe much can be achieved in cost savings
and in a reduction of adversity and litigation through the application of good project
management and a fair contract.
CHAPTER 4
NEW ENGINEERING CONTRACT
PRINCIPLES
CHAPTER 4
NEW ENGINEERING CONTRACT PRINCIPLES
4.1
Introduction
Dr. Martin Barnes wrote:-
“The management of projects has become a science with its own set of rules,
techniques and words which are not even mentioned in the existing standard
forms. If the conditions of contract were redraughted from first principles,
having regard to modern management methods, a much more purposeful
document could be produced.” 90
NEC is intended to be an effective contract governing a project and concurrently
serving as a project management manual leading team players to complete a project
based on mutual trust and co-operation. This chapter explores the NEC family of
contracts, the structure and objectives of NEC and detailing salient aspects of the
NEC.
90
Barnes, Dr. Martin et al. Towards Simpler Contracts. In Proceedings of the Institution of Civil
Engineers, June 1986.
43
4.2
The NEC Family of Contracts
NEC Family of Contracts comprises as follows:-
4.2.1
Engineering and Construction Contract (ECC)
a)
ECC Option A : Priced Contract with Activity Schedule
b)
ECC Option B : Priced Contract with Bill of Quantities
c)
ECC Option C : Target Contract with Activity Schedule
d)
ECC Option D : Target Contract with Bill of Quantities
e)
ECC Option E : Cost Reimbursable Contract
f)
ECC Option F : Management Contract
g)
Guidance Notes for Engineering and Construction Contract
h)
Flowcharts for Engineering and Construction Contract
The ECC (Black Book Second Edition) is the main contract form comprises
of core clause and additional core clauses for each of the six Options listed
above, additional clauses for Secondary Options, the Schedule of Cost
Components and Contract Data proforma. The publication is drafted as a
traditional main contract between Employer and Contractor.
4.2.2 Engineering and Construction Subcontract (ECSC)
This is essentially the same form as the Black Book, with minor adjustment
of specified periods and designated as “the form of subcontract for use with
the NEC”, it could also be used independently with other standard forms if
wished. ECS is encouraged to be used by the Main Contractor in entering
agreement with his Subcontractor as the provisions are back-to-back
provision.
4.2.3
Professional Services Contract (PSC)
This form may be used for the appointment and govern the terms of
engagement of various parties; in particular, the Project Manager, Supervisor,
Architect, Engineer or Designers could work under the PSC on a project.
4.2.4
Adjudicator’s Contract (AC)
The AC was one of the two additional contracts published outside the original
boxed set of forms along with the PSC. The AC is the shortest of the NEC
forms and comprises of three parts; namely a Form of Agreement, Conditions
of Contract and Contract Data.
4.2.5
Short Contract (SC)
This is a short version of the Subcontract Form intended to be used for less
complex works with low risk to the parties and where there is no need for
sophisticated management techniques.
4.2.6
Partnering Agreement (PA)
This form is intended to be used when multi-party partnering arrangement is
desired. The PA adopts the traditional NEC clause structure although it omits
options.
Further discussion in this chapter focuses on the Engineering and Construction
Contract (ECC) also known as the Black Book as the main topic of this dissertation.
45
4.3
Structure of the NEC
In establishing the NEC, the format for all contract documents is similar. The
purpose is so that knowledge of the system of contract documents is
facilitated. Each contract is divided into three main sections: Nine (9) Core
Clauses (identical for each contract), Main and Secondary Options (different
for each contract).
4.3.1
Nine (9) Core Clauses
The said nine (9) Core Clauses are as follows:-
a)
General
This Section identifies and defines terms, communication procedures, parties
involved and other generic idea found in other standard forms of contract.
b)
The Contractor's Main Responsibilities
This section details the Contractor’s responsibilities and provision for
Contractor’s design, assignment and subcontracting.
c)
Time
This part deals with one prominent aspect of NEC that is the Accepted
Programme. Other aspects of time, like completion date and site
46
possession date is also detailed. NEC has an important provision that many
traditional contracts fall short that is the provision for work acceleration.
d)
Testing and Defects
This provision details aspects of testing and inspection, correction of defects
and acceptance of defects.
e)
Payment
This clause details assessment of payment periodically. It provides time scale
for payment to be made from the date of valuation on site. The NEC tenet is
that the Employer's greatest responsibility is to pay the Contractor.
f)
Compensation Events (Variation Orders)
This clause deals on how assessment to Compensation Events is to be
made. It details communication or procedures to be follow from the day
Compensation Events are notified by Contractor.
g)
Title
This clause details on the ownership of title to materials, plants and
equipment and in what circumstances title changes.
h)
Risks and Insurance
The Employer’s and the Contractor’s risks are set out, as well as what
the insurance is required for each.
47
i)
Disputes and Termination
This is an utmost important clause within NEC. It details procedures for
dispute resolution, as well as the procedures for termination. In the Latham
Report on procurement and contractual arrangement in United Kingdom, Sir
Michael Latham concludes that the Adjudication is the optimum way of
resolving disputes NEC explicitly has a provision that all disputes must be
referred to Adjudicator prior to pursuing further to litigation or arbitration. 91
4.3.2 Main Option Clauses
The NEC publishes the main options together in one book as well as
individual merged versions in different colored contract books. The one book that
contains all relevant clauses in respect of each main option has a black cover and has
occasionally been referred to as “Black Book”. 92 Each merged version contains all
the relevant clauses as well as any relevant schedules of options for the respective
main option. This enables the clauses and options to be read together as a whole in
one document. The merged versions also contain any incidental amendments that are
required to the wording to accommodate each respective main option.
The availability and range of options open in the use of the NEC is said to
facilitate teamwork by giving the employer a choice over contract strategy and
allocation of risk. 93 The Main Options comprises of different contracting mechanism
to suit an Employer’s need namely:-
91
Final Report of the Joint Review of Procurement and Contractual Arrangements in the United
Kingdom Construction Industry. HMSO, London, July 1994
92
O’Reilly, Michael. (1996). Civil Engineering Construction Contracts. London:. Thomas Telford.
p.311.
93
Kwayke, A. A. (1997). Construction Project Administration in Practice. Addison Wesley Longman,
Harlow. Ascot: CIOB. p. 105.
48
a)
Main Option A - Priced Contract with Activity Schedule
This is ideally used for Contractor's Design or if the Employer's design is
substantially complete at time of tender. Contractors are paid base on
completed activity in Schedule.
b)
Main Option B_-_Priced Contract with Bills of Quantities
This is the usual Option chosen. This is similar to the traditional remeasurement contract. This cannot be used for Contractor's Design as most
time Contractor lack time and skill to produce Bills of Quantities.
c)
Main Option C - Target Contract with Activity Schedule
This is close to Option A but it allows the Employer the flexibility in
developing his design. In short, Employer can afford design to be incomplete
at time of tender. Target Contracts are in fact Reimbursable Contract where
the reimbursement of cost ceases or reduces when a target price is reached.
The difference between Option C and D is such that in Option C, target price
is based on a lump-sum where as in Option D the target price is based on a
Bills of Quantities.
d)
Main Option D - Target Contract with Bills of Quantities
In this Target Contract based on Bills of Quantities, the Employer takes the
risk on changes in the quantities or any departure from the agreed method of
measurement. Target price is then adjusted according to final measurement.
49
e)
Main Option E - Cost Reimbursable Contract
This Option E permits maximum flexibility in design and allows design to
develop as work proceeds at site. Contractor will be reimbursed with the
actual cost incurred on top of the agreed percentage fee agreed upon.
f)
Main Option F- Management Contract
Option F is generally used when Main Contractor subcontracts out all or most
of the work. This is also suitable for contracts with a high reliance on
specialist subcontractors who undertake their own design.
Each of the main options is published in a separate book which includes relevant
core clauses for the particular option.
4.3.3
Secondary Options Clauses
This is the part where Employer chose and selects the desire options to be
included in the Contract Data (An Appendix to NEC Main Contract). The Secondary
Options allow the parties themselves to be the drafters and to make many of the
choices which might otherwise have been made for them in other standard forms
which then often necessitate amendments. The optional clauses are in essence
different solutions for the parties.
identified as follows:-
The Secondary Option clauses in NEC is
50
a)
Option G - Performance Bond
This option is used when financial security is required for the performance of
the Contractor in accordance with the contract.
b)
Option H - Parent Company Guarantee
Option H provides guarantee that the work will be finished in
accordance with the contract. This guarantee is normally appropriate where
the Contractor has a parent company.
c)
Option J - Advance Payment to The Contractor
This option is applicable when Contractor has to make a substantial
investment at the beginning of the contract.
d)
Option K - Multiple Currencies
Option K is generally used when payment to the Contractor should be made
in more than one currency and the risk of exchange rate changes should be
carried by the Employer.
e)
Option L - Sectional Completion
Where there is a requirement for sections of the works to be completed before
the whole of the works, this option can be used. If this option is included,
each section in the Works Information must be defined.
51
f)
Option M - Limitation of the Contractor's liability for design to reasonable
skill and care
Option M is frequently applied to design work. It reduces the Contractor's
liability for his design to be in accordance with the Works Information. In the
event of a defect, the Contractor has adequate defense if he can show
that he used reasonable skill and care.
g)
Option N - Price Adjustment for inflation
Where Employer decides to accept risk of inflation, Option N is applicable.
h)
Option P – Retention
Option P is used when additional financial security is required should the
Contractor not complete any part of the works, and other Contractors need to
be called upon to complete the works.
i)
Option Q - Bonus for Early Completion
This option is applied to motivate Contractor for completion before the
Completion Date in the Contract Data.
j)
Option R - Delay Damages
Option R is generally used when delay in completion of the contract will have
adverse financial implications. This option is recommended to be included in
most contracts.
52
k)
Option S - Low Performance Damages
As to performance in terms of the Works Information is important and
performance is difficult to quantify, Option S is applicable. This option
relieves Employer of burden to prove that Contractor’s work is substandard.
l)
Option T - Changes in the Law
Option T applied when the Employer decides to accept the risk of changes in
the law occurring after the Contract Date.
m)
Option U - The Construction (Design and Management) Regulation
Option U on the effects of the Construction Design and Management is
applicable to contracts in the UK where a delay to the work caused by
application of The Construction (Design and Management) Regulations 1994
could not reasonably have been foreseen by an experienced Contractor.
n)
Option V - Trust Fund
This clause was designed to protect a firm, against insolvency of its
Employer. It is recognized that trust laws differ from country to country.
o)
Option Z – Additional Conditions of Contract
Option Z is used for any special conditions of contract, which may be
required.
No options are assigned to the letters I, O, W, X or Y and it may be emphasized that
not all of the secondary options are applicable to all main options.
53
4.4
NEC Objectives
The importance of clearly articulated drafting objectives for a new standard
form has been underscored with the release of the NEC. Few recent standard forms
have set their drafting objectives so clearly from the outset as the NEC. The stated
objectives for the design of the NEC were to make improvements under the headings
as follows:-
4.4.1
Flexibility
Flexibility is one of the main articulated drafting objectives for the NEC. In
general, a flexible form is intended to be a responsive form where one that takes into
account and responds to ever-changing needs. The flexibility of the drafting has been
singled out as providing two advantages by Professor Andrew Cox and Ian
Thompson; namely a variety of contractual approaches to risk apportionment
depending upon the contingent circumstances of each project; as well as managing
the relationship with the contractor.
94
The flexibility of the NEC is said to derive
from four principal factors as follows:- 95
a)
The contract system is intended for engineering and construction work across
traditional disciplines such as civil, electrical, mechanical and building work.
b)
The contract system can be used whether the contractor has some design
responsibility, full design responsibility or no design responsibility.
c)
It provides all the normal current options for types of contract such as
competitive tender, target contracts, cost reimbursable contracts and
management contracts.
d)
94
It can be used in the United Kingdom and other countries.
Cox, Andrew and Thompson, Ian. (1998). Contracting for Business Success. London: Thomas
Telford. p. 171.
95
Guidance notes, NEC, 1.
54
The NEC focuses not on what divides the industry but on what unites it; for
example, traditional roles, specialist contractors and suppliers, employer procurement
options, and in this regard is seeking to lead the vanguard of new multidisciplinary
forms. Perry and Hoare make the point dial: it is not just the proliferation of forms
that is problematic in industry but their proliferation across different disciplines.
Multidisciplinary projects today necessitate cross-disciplinary forms. 96
The choice of six main options plus the option of further choices is a
significant innovation in the presentation of standard forms. By focusing on
commonality in a small number of core and option clauses it has been possible to
achieve the diversity of project organization from a drafting standpoint. Flexibility
through the use of optional clauses allows for individual variations. The various
options also present significant choice in terms of their respective payment
mechanisms.
The result of flexibility in choice is a high degree of customization available
to the parties as well as freedom of action. Flexibility both as itself and as a norm has
also been equated with judicial discretion:-
Legal rules and principles are of three kinds. . . the third class is, in a sense,
the most important class of all, and the rules and principles composing it may
properly be described as formulae for judicial discretion. The primary axiom
of the formula for judicial discretion may be stated thus: the formulation of a
principle that has no meaning in itself maximizes the flexibility of the law.
Where there is some uncertainty, there is some flexibility, and where the
uncertainty is total, the flexibility is commensurate. 97
96
Perry, J. G. and Hoare, D. J. Contracts of the Future: Risks and Rewards. In Future Directions in
Construction Law. Proceedings of the Fifth Annual Conference of the Centre of Construction Law and
Management. London: , King's College. 1992, p. 81-97
97
Grunfeld, C. Reform in the Law of Contract, Modern Law Review, 1961. vol. 24, p. 73-74.
55
4.4.2
Clarity and Simplicity
The New Engineering Contract has introduced some plain English into the
world of contracts. A contract is an agreement between two or more parties
to do something. Clarity of language in which the contract is written is vital if
roles are to be understood and risk apportioned in the manner intended. Time
alone will test whether plain words will survive in a litigious system where
lawyers and advisors will demand alterations from a standard form to protect
their clients’ interest. 98
Ann Minogue neatly sums up the views toward the wording of the form when it was
first launched in 1993:-
The NEC was greeted by the legal profession with a sort of stunned silence.
The concept of a form written in what appeared to be plain English and in the
present tense was a difficult one for business which lives by words and the
many nuances thrown up by their interpretation. 99
Minogue wrote that taken as a whole, the NEC is now coming of age as an
imaginative and valuable contract form. 100 These observations are telling. First of all
it may be noted that the criticism has muted. Secondly, it is now the details of the
contract system which are receiving the attention rather than simply the wording. It
would appear the NEC may have begun to plays significant role in reshaping
attitudes within industry and perhaps not simply attitudes toward new forms of
contract but attitudes towards change itself.
98
Construction Law, August/September 1993, contents page.
Minogue, Ann. On the NEC Road Forward. Construction Legal Times Supplement. May 1996.
100
Ibid.
99
56
Two studies into the perceived clarity of the NEC, one by Jon Broome 101 and
one by Rhys Jones 102 rank the NEC very highly compared to other standard forms of
contract. The NEC, is said to be drafted in “ordinary language”. 103 The “ordinary
language” objectives of the drafters are intended to be fulfilled through greater
“clarity and simplicity”. An early elaboration by Martin Barnes on three (3) ways in
which standard forms could be simplified was set out in 1986 as follows:- 104
a)
Express the responsibilities of the parties more simply perhaps with some
rearrangement of the allocation of risk and responsibility.
b)
Incorporate management procedures into the contract so that it is clearly
management based.
c)
Avoid legalistic words, style and layout.
While few would argue with these aims, there is a counter-argument to the
aim of simpler expression is that it must not be achieved at the expense of or take
precedence over legal certainty. Brian Eggleston, has raised the issue in this way:-
For legal interpretation of the contract the problem is not so easily
solved... and the application of legal precedents from traditional forms of
contract written in conventional drafting style can only be surmised; which
raises the question, has the NEC sacrificed legal certainty in pursuit of a new
order? 105
101
Broome, J. C. A Comparison of the Clarity of Traditional Construction Contracts and of the New
Engineering Contract. http://www.reading.ac.uk/kcshuwill/arcom/jonbroome.html.13 January 1999.
102
Rhys Jones, S. (1992). The Influence of Law, Language & Perception on Conflict in the
Construction Industry. M Sc dissertation, London: Centre for Construction Law and Management,
King's College.
103
Guidance notes, NEC, p. 2.
104
Barnes, Dr Martin. et al. Towards Simpler Contracts. In Proceedings of the Institution of Civil
Engineers, June 1986.
105
Eggleston, Brian. (1996). The New Engineering Contract, A Commentary. London: Blackwell
Science.
57
Notwithstanding differences of view over the value of legal precedent it may
be noted that NEC drafting follows modern drafting practice and conventions in a
number of respects. For example, the European Union tenders on occasion for legal
guides to be drafted in plain language. 106 Significantly “must” replaces “shall” and
this change has now become the standard in Canadian plain language drafting.
107
The change to replace decimals provides an interesting comparison because of the
same debate surrounding various standards forms of contract. 108
There are a number of demonstrably verifiable features of the NEC that
would suggest that the drafters have achieved a greater measure or clarity and
simplicity than other comparable leading standard forms. Thus, there are fewer
clauses used as a general rule than under other forms. Assimilation of the clauses
contained within the NEC have also been made easier by the order in which they are
presented. Clauses of a like nature have been grouped together in nine sections
identified as “core clauses”. The sentences are generally shorter although
commentators have questioned the brevity of the wording. 109
The use of guidance notes, recommended by Latham
110
as well as the use of
flowcharts, both facilitate understanding and is submitted clarity and simplicity.
Simpler and more generally worded language that is less industry specific should
facilitate translations. From the drafters’ point of view as it is arranged and organised
in a structure which helps the user to gain familiarity with its contents. These features
would appear support the claims of a clearer and simpler form of contract.
106
Dalby, J. (1997). EU Law for the Construction Industry. Oxford: Blackwell Science.
Under the Interpretation Act, Revised Statutes of British Columbia (RSBC) 1996, section 2.
108
Jones, Glyn P. who is a harsh critic of decimalized numbering in JCT 80: A New Approach to the
1980 Standard Form of Building Contract. Lancaster: The Construction Press.
109
Clarke, J. R. NEC - Thoughts and Questions. Civil Engineering Surveyor, July/ August 1993.
110
Latham Report, paragraph 5.18 (4), 37.
107
58
4.4.3 Stimulus to Good Management
The New Engineering Contract represented a radical departure from the
time-hallowed principles that, despite ever-increasing length, have underlain
all earlier editions of the ICE Conditions. The New Engineering Contract
involved an act of faith namely, that the application of project management
techniques will improve the adversarial nature of contracting. 111
The NEC drafters always intended that the new form should be a stimulus to good
management and Perry describes this as “the most important characteristic of the
NEC”. 112 Martin Barnes too notes the contrast of the NEC in this regard to
traditional forms. The management of projects has become a science with its own set
of rules, techniques and words which are not even mentioned in the existing standard
forms. 113 Professor John Uff QC has noticed this gap and how “low key” traditional
management techniques have been.
The impact of management on contract documents has been minimal in some
cases; and in others, attempts to incorporate the provision of management
have stopped at the level of specifying services, with no clear definition of
duty being undertaken, and no effective sanction against non-performance.
There is a clear need to examine conditions of contract to ascertain their
relevance and usefulness in areas of management 114
111
Stringer, George. The Future Role of Standard Forms of Contract. In Future Directions, p.115.
Perry, John G. The New Engineering Contract: Principles of Design and Risk Allocation.
Engineering, Construction and Architectural Management, 1995, 2 (3), p.197, 198.
113
Barnes, Dr Martin et al. Towards Simpler Contracts. In Proceedings of the Institution of Civil
Engineers, June 1986.
114
Uff, John. Overview: The Place of Management in Construction. Management and Construction
Law. A one-day seminar on 23 March 1990 by the Centre of Construction Law and Management.
King's College, London.
112
59
One of the vehicles in NEC to accomplish the intention of stimulating to good
management is the “Early Warning” provision. The Early Warning provision
provides for a binding obligation for either party, subject to the contract, to present
anything that may affect the cost, time and quality of the work. The parties are
motivated to comply, because it is in their best interest to communicate, to be
aware of potential obstacles, and to act quickly.
The approach to the management of “Compensation Events” which includes
variations is also innovative. Under the NEC the contractor is required to consider
alternative approaches and submit quotations for dealing with problems before the
event. The contractor must include full effect of the variation including a possible
delay and disruption costs in his quotations, the theory being that the contractor will
then be indifferent to any choice made by the employer. Once the quotation for the
variation is accepted by the project manager, the contractor then retains the incentive
to complete the work and the risk to the employer is minimized. 115
The key to the introduction and reinforcement of sound management
practices in the NEC, in contrast to most of the traditional standard forms, is the
procedures that the contract calls for. A. A. Kwakye
116
sees this as an advantage for
the form where the NEC standard form of contract provides for detailed procedures
for managing construction project risks as they occur. The procedures
implementation should contribute to rather than detract from the effectiveness of
management of the work”. 117
115
Eggleston, Brian. (1996). The New Engineering Contract, A Commentary. London: Blackwell
Science.
116
Kwakye, A. A. (1997). Construction Project Administration in Practice. Harlow : Addison Wesley
Longman. p. 105.
117
Thomas Telford Limited. (1997). URL: http://www.t-telford.co.uk/Nec/nechome.html. Thomas
Telford Electronic Publishing Services.
60
4.4.4
Role Integration
As the NEC is intended to integrate and govern consistently the various roles
and duties of those involved in construction projects. The Latham Report
recommends in part that an effective form of contract “clearly defines the roles and
duties of all involved” The essential point to take is that the NEC is designed to
operate on a fully interlocking basis. 118 This is held out as a major difference from
other standard forms and one of the principal advantages of the NEC.
The absence of significant differences between the main and subcontract
forms is one aspect of a true interlocking form. Dr Martin Barnes has written:-
The text of the subcontract differs from the main contract only in the names of
the parties and ill a few details in the areas of payment and notice, periods,
insurance requirements and title to equipment, plant and Materials. 119
The uniqueness of the NEC is also in how it has affirmed the importance of
interlocking conditions across consultants’ terms of engagement. 120 The importance
of clear associations founded on good co-operative relationships will serve to reduce
the potential number of claims themselves. 121 The clarity of the relationships is
facilitated in the NEC by an approach having been adopted that defines the roles of
those involved in terms of the actions and decisions they take rather than simply who
they are and thus what one assumes about their respective positions.
118
See Latham Report, paragraph 5.18(3),37.
Barnes, Dr Martin. (1996). The New Engineering Contract – An Update. International
Construction Law Review. p. 89, 90.
120
Uff, John and Jefford, Nerys. (1993).European Harmonisation in the Field of Construction.
International Construction Law Review, p.126.
121
Worby , G. Tyler, A. H. and Harris, F. C. Management of Claims. Building Technology and
Management. July/August 1985. p.23-25.
119
61
4.4.5
Risk Allocation
Most traditional forms of contract have made almost no allowance for risk in
their conditions and very few cases ever address the subject. 122 Most standard form
contracts will rather deal with risk allocation, and. to a small degree risk response
such as liquidated damages. Not long ago a leading figure in both contract and
construction law, Professor Michael Furmston, wrote that he doubted whether any of
the traditional standard forms were guided by modem principles of risk allocation. 123
Morris has remarked upon the close association between risk management as
understood in these terms and the NEC. He states that the results of risk management
are now slowly beginning to become incorporated in some legal forms - the New
Engineering Contract being the best and most obvious example. 124
One of the most significant attenuations to the agreed allocation of risk
corning out of the NEC is its use of a “compensation event procedure”. The
compensation event procedure plays a central role in reallocating risks, essentially
time and cost risks. A transparent means of addressing the probable cases, which the
NEC has set out as compensation events, is an important aspect of the form.
In summary, risk is the key to the design and successful use of the NEC.
According to one of the NEC’s proponents, Andrew Baird, users of the NEC gain a
better understanding of the role of contract conditions, risk allocation and
responsibility and contract strategy than under other forms procurement. 125
122
One exception to this is the case of Photo Production Ltd v. Securicor Transport Ltd [1980] AC
827, [1980] 1 All ER 556, HL.
123
Furmston, Professor Michael. (1986). The Liability of Contractors: Principles of Liability in
Contract and Tort. London: Longman. p. 13.
124
Morris, Dr Peter, Current Trends in the Organisation of Construction Projects. In Future
Directions, p.181.
125
Baird, Andrew. (1994). The New Engineering Contract – A Management Summary for Plant
Industry Users, 1995, International Construction Law Review. p.116
62
4.4.6 Role of Co-operation at Law and the NEC
The role of co-operation in the NEC is arguably the most important principle
underlying the operation of the contract system and the one with potentially the most
profound implications for it as a whole. Classical contract theory assumes the parties
perform their contracts as agreed. Parties are contractually bound to perform
according to the terms of the contract. There is no additional obligation or duty to cooperate in the performance in classical contract theory.
However, in practice, the courts have insinuated duties to co-operate into
parties’ agreements through a variety of devices including the general rules of
interpretation of documents and implication of terms or gap fillers. Leaving aside
general rules of interpretation, courts will enforce not just the terms parties have
expressly agreed to but also the terms that can be logically implied from those
express terms. 126 Logic, however, is not a strict limiting factor and there are many
other cases where the law admits of and invokes implied terms.
“Implied terms” is a nomenclature used although it “covers a number of
dissimilar notions”. 127 Other terms used have included “implied conditions”,
“constructive conditions”, “conditions implied in law” and “conditions implied-infact”. 128 Lord Steyn has written that “Often the expectations of the parties would be
defeated if a term were not implied such as sometimes a contract simply will not
work unless a particular duty to co-operate is implied….Such terms operate as
default rules.” 129
126
For cases on the distinction between implication of terms versus interpretation of express terms:
Aspdin v. Austin (1844) 5 QB 671; Re Cadogan & Hans Place Estate Ltd, Ex p Willis (1895) 11 TLR
477, CA; Williams v. Burrell (1845) 1 CB 402; 14 LICP 98; 135 ER 596; and A E Farr Ltd v. The
Admiralty [1953] 2 All ER 512, [1953] 1 WLR 965.
127
Halsbury’s Law of England, 4th edn reissue, vol. 9(1) paragraph 778.
128
Patterson, Edwin W. (1942). Constructive Conditions of Contract. Columbia Law Review. p. 903
129
Lord Steyn. (1997). Contract Law: Fulfilling the Reasonable Expectations of Honest Men. Law
Quarterly Review, p.441-442.
63
4.4.7
Prevention
Lord Asquith, from William Cory & Son Ltd v. London Corporation, 130 is
often credited with one of the leading statements of what has occasionally been
shortened and referred to as the “prevention principle” as follows:-
The claimants argue that it is an implied term of every, or almost every,
contract between A and B ... that A shall not prevent or disable B from
performing the contract and vice versa. . . In general, no doubt, it is true that
a term is necessarily implied in any contract whose other terms do not repel
the implication, that neither party shall prevent the other from performing it,
and that a party so preventing the other is guilty of a breach.
The issue of whether the prevention amounts to a breach of contract is also assumed
in Stirling v. Maitland and Boyd. 131 The Stirling case involves a somewhat different
obligation to maintain conditions within one’s control; thus it was said:-
If a party enters into an arrangement which can only take effect by the
continuance of a certain existing state of circumstances, there is an implied
engagement on his part that he shall do nothing of his own motion to put an
end to that state of circumstances under which alone the arrangement can be
operative. 132
In conclusion, category of cases where implementation of the contract has already
commenced the party refusing to co-operate in the implementation of the contract at
issue has been held to be in breach of that contract. One is expected to use his best
efforts to carry out the contractual project, and not to interfere with the contractual
environment in a way that may hinder performance. 133
130
[1951] 2KB 476 at 484, [1951] 2 All ER 85.
[1864] 5 B & S (Eng) 840, 852.
132
As per Cockburn CJ.
133
Nassar, Nagle. (1994). Sanctity of Contracts Revisited: A Study in the Theory and Practice of
Long- Term International Commercial Transactions. Dordrecht: Martinus Nijhoff Publishers.
131
64
4.5
Salient Aspects of the NEC
The choice of a construction contract has very wide implications for the
delivery of products in society. With recognition of these implications have come
calls for increasing accountability of the industry in reports Constructing the Team.
134
NEC was said to have contributed to the fruition of raising performance and
efficiency in the construction industry in the future. 135 To add on, the importance of
“contract strategy” or the broader issue of procurement was recognized in an early
Business Roundtable Report in 1982. 136 The NEC drafters understand this
importance and have thus adopted a flexible approach to the issue.
The NEC has been endorsed as one means of rationalizing the number of
forms and improving communications in industry. The endorsement emanates from
research that was carried out in furtherance of a prototype authoring system for
drafting ad hoc construction contracts as opposed to standard forms. The NEC on
this view stands somewhere between a simple database of clauses and traditional
standard forms that offer no clause choices.
Although the NEC was introduced to the engineering and construction
industry for use back in year 1993, research and publications on the NEC are limited
because of its newness to the practice of engineering and construction. Hughes
contends that supporters of the NEC would “like to think that....people are busy using
it, rather than writing about it.” 137 At the same time, academics and the ICE monitor
and analyze the impact of the NEC.
134
Latham, Sir Michael. (1994). Constructing the Team: Final Report of the Joint Review of
Procurement and Contractual Arrangements in the United Kingdom Construction Industry. London:
HMSO.
135
See generally Managing Construction in the 90s. Profiting from Trends and Innovation.
Proceedings of a conference in London during October 1993. London: School of Business and
Industrial Management.
136
Contractual Arrangements: A Construction Industry Cost Effectiveness Report. Business Round
Table, London, 1982.
137
Hughes, K. (1997). “The Cardiff Millenium Stadium.” The New Engineering Contract Users’ Group
Newsletter. London: Thomas Telford Limited. Issue 9, p.3.
65
This segment explores the fundamentals of NEC and how provisions here
differ from traditional forms of contract. Further then, this shall form a platform of
understanding, prior to the analysis of survey on the attempt of NEC to address the
shortcomings of traditional forms of contract.
4.5.1 Language
A distinctive aspect of the collaboration of the NEC is the language. It is
ordinary and simple enough to be understood by the working parties. According to
Jon Broome, there has been unanimous agreement with the statement “compared to
other forms of contract, the way the NEC is written is easier to understand”. 138 The
wording of the NEC documents is in ordinary language. The purpose is to minimize
the incidence of disputes arising from ambiguous meanings. The ICE believes that
the contract’s simplified language will make the NEC system ideal for use. 139
Onto whether “legal language” is needed, Max Abrahamson explains that
when a standard form or special term for a contract has to be drafted, much time and
money is spent employing lawyers to translate it into legal language, and then
employing other lawyers to translate it back again when the users want to know what
it means. Further to this, the serious risk, often realized is that much is lost, distorted
or overlooked in the process of translation and re-translation. 140
138
A comparison of the clarity of traditional construction contracts and of the New Engineering
Contract. URL: http://www.rdg.ac.uk/AcaDepts/kc/ARCOM/jonbroome.html
139
Yuille, M. (1991). New building contract “will reduce litigation”. Property. London,
England, January.
140
Abrahamson, Max (1983). Risk Management, Construction Insurance and Law. FIDIC.
66
Ian Duncan Wallace, writing about the need for redrafting, states that
standard forms of construction contract tend to be clothed in a legalistic, poor quality
jargon,
ideally
suited
to
conceal
and
obscure
practical
intentions
and
consequences". 141 He states in perhaps extreme language, “the draftsmanship of
available standard forms in all countries is of the poorest kind, and in the United
Kingdom and Commonwealth largely derived from very old precedents, often in
archaic language drafted by lawyers with little or no experience of the needs of
construction project." 142
NEC is written straightforwardly with few long words and no long sentences.
There is no legal terminology in the NEC, except in the insurance clause, thereby,
reducing the need for legal counsel. Sentences were written to have no more than 40
words at a time. Also, NEC language is mandatory. For instance, the NEC states that
“The Employer, the Contractor, the Project Manager and the Supervisor shall act
as stated in this contract and in a spirit of mutual trust and cooperation. The
Adjudicator shall act as stated in this contract and in a spirit of independence.” The
language in NEC is intended to be familiar to the language of builders and
other people in the construction industry worldwide.
Consistent with the unequivocal language, the NEC is designed in a
bulleted structure that is easy to read. Unlike traditional contracts, there is no
cross-referencing. Many of the customary legal concepts and forms of words are
discarded in the interests of better communication and management of projects. 143
Thus, the NEC can be used and employed by persons of various experiences and
knowledge of construction practices. Essential to the success of the construction
enterprise, the contract documents are easy to read and understand, which are
means to increased efficiency and better management of projects.
141
Duncan Wallace, I N. (1986). Construction Contracts : Principal and Policies in Tort and
Contract. Sweet and Maxwell. p. 265.
142
Ibid
143
Thompson, Roxene. (1998). Efforts to Manage Disputes in the Construction Industry : A
Comparison of the New Engineering Contract and the Dispute Review Board. Virginia Polytechnic
Institute and State University.
67
4.5.2
Mutual Trust and Co-operation
The classic statement of requirement for co-operation in contracting comes
from Lord Blackburn in MacKay v Dick 144 .
I think I may safely say, as a general rule, that where in a written contract it
appears that both parties have agreed that something shall be done, which
cannot effectually be done unless both concur in doing it, the construction of
the contract is that each agrees to do all that is necessary to be done on his
part for the carrying out of that thing, though there may be no express words
to that effect. What is the part of each must depend on the circumstances.
Another case, Hamlyn & Co v Wood & Co 145 held that the question whether
in any situation an implication ought to be made must depend on the particular facts
of the case, and that the construction of one contract in this respect affords little or no
guidance for the construction of another. It has been stated there is no general rule
that terms cannot be applied into standard forms contract. The same principles apply
to standard forms of contracts as they do to negotiated contracts. 146 On this authority,
an argument can be made that similar considerations apply when construing NEC.
The NEC has taken a brave step forward, so far as English law is concerned,
in expressly including an obligation for the parties to act in “a spirit of mutual trust
and co-operation”. Twenty years earlier, Lord Devlin in his lecture “Morals and the
Law of Contract” had made the telling point that, “If a man minded only about
keeping faith, the spirit of the contract would be more important than the letter. But
in the service of commerce the letter is in many ways the more significant”. 147
144
[1881] 6 App Cas 251 at 263, HL.
[1891] 2QB 488; [1891-94] All ER Rep 168, CA.
146
Kaplan J in Jardine Engineering Corp Ltd & ORS v Shimizu Corp [1992] 2 HKC 89 (HC).
147
Eggleston, Brian. (1996). The New Engineering Contract, A Commentary. London: Blackwell
Science. p.72.
145
68
It is questionable whether, when it comes to enforcement, the imposition of
duties of good faith and fair dealing into contracts amount to much more than a duty
not to act in bad faith. The difficulty with such admirable concepts as good faith, fair
dealing, mutual trust and co-operation is determining what function they are intended
to serve whether they really intended to be legally enforceable or only an expression
of good intent or warranties to act reasonably.
It can be acknowledged the theoretical framework outlined for the NEC is
postulated in terms of not only primarily co-operation but also good faith and
fairness impliedly influencing the interpretation and application of the form. 148 Some
writers carefully equate co-operation and good faith. Hugh Collins writes “the United
States lawyers describe the duty of co-operation during performance as the obligation
to perform in good faith”. 149 Hence, even apart from an argument that good faith, or
good faith or fair dealing, could be implied in the NEC in many situations, the
express reference to co-operation alone might suffice to import the notion.
In summary, the NEC itself with its detailed framework for the allocation of
risk has already provided means for determining the parties’ obligations. However, it
is to be expected that situations will arise in construing the NEC in the context of and
in conjunction with this framework where it will be unclear upon whom a particular
risk is imposed or even the extent to which it should be borne if it is to be shared. In
such a case further consideration would have to be given to the issue of how the
parties should fulfil their duty to co-operate.
The theoretical basis for the NEC posited here presupposes a relational view
of the parties and, consistent with that view, norms will be important in determining
their respective obligations. The most important norms in this regard, as has been
seen, remain those premised upon co-operation, fairness and good faith.
148
149
Burrows, J. F. Contractual Co-operation and the Implied Term. Modern Law Review, 1968.
Collins, Hugh. (1993). The Law of Contract, 2nd edn. Butterworths, London : Butterworths. p.304.
69
4.5.3
Supporting Materials – Guidance Notes and Flowcharts
An innovation of the design and compilation of the NEC is that
Guidance Notes and Flowcharts accompanying the contract. The NEC contract
system comprises and indeed was based upon flow charts which set out the
procedures that are to be followed by parties to the contract. 150 The importance of
following contractual procedures can be seen from a major literature review carried
out by Majid and McCaffer, who ranked inappropriate practices and procedures as
the eleventh most significant factor in causing non-excusable delay. 151
Flowcharts are represented pictorially with a defined protocol or legend and
uniform abbreviations. 152 The Flowcharts outline all the steps and procedures that
are undertaken from acceptance of the contract until final payment is made. It
shows who does what and when in plain and simple terms, and indicates the
consequences for each course of action and what should follow that chosen action. 153
Unambiguous roles, responsibilities,
and
procedures
are
vital
links
to
a
successful and effective contract.
Flowcharts are central to one of the key drafting objectives of the NEC;
clarity and simplicity in the use and operation of the contract system.
154
The flow
charts seek to achieve this end by overcoming conflicts in contract procedures and
ensuring that procedures are not open-ended. Clarity, the ease with which the
language of the contract can be understood, has been shown to be an important factor
in reducing risk. 155
150
NEC flow charts, preface.
Majid, M. Z. Abd. and McCaffer, Ronald. Factors of Non-excusable Delays That Influence
Contractors’ Performance. Journal of Management and Engineering, May/June 1998, 14 (3), p.42
152
NEC flow charts, preface.
153
Barnes, Dr. Martin et al. Towards Simpler Contracts. In Proceedings of the Institution of Civil
Engineers, June 1986.
154
Guidance notes Consultation Document, 3
155
Bubshait, Abdul Aziz and Almohawis, Soliman. Evaluating General Conditions of a Construction
Contract. International Journal of Project Management, 1994, 12 (3), p.134.
151
70
The NEC contains a set of guidance notes. The purpose of the guidance notes
is “to explain the background to the ECC, the reasons for some of its provisions and
to provide guidance on how to use it”. 156 The Latham Report 157 in part
recommended attached guidance notes for an effective form of contract. The
importance of guidance notes has been confirmed in the Latham Report and Matthew
Hall Ortech Ltd v Tarmac Roadstone Ltd
158
which relied upon them as an aid to
construction of the IChemE Model Form of Conditions of Contract for Process
Plants.
The Guidance Notes provide explanations and principles for the provisions
and procedures, and how to apply them. The Flowcharts and the Guidance Notes are
not parts of the contract, but assist the management of the project. The Guidance
Notes are often used to settle a difference in interpretations of a clause. The
differences in drafting and operation of the NEC with other forms suggest that the
guidance notes have an important role to play.
If there is a conflict in or across the contract documents we may assume that
well-informed drafters were aware of the conflict and that the solution in the contract
is the one chosen, and in many cases once again, we also see why the particular
solution was chosen. 159 In this way, the guidance notes facilitate understanding and
were intended in any event to be used in training individuals in the use of the
NEC. 160 The importance of training to the successful introduction of the NEC is
viewed by NEC panel members as essential. 161
156
Guidance notes NEC, 1.
Constructing the Team. Final Report of the Joint Review of Procurement and Contractual
Arrangements in the United Kingdom Construction Industry. HMSO, London, July 1994
158
[1998] 87 BLR 96.
159
Sweet, Justin. (1994). Judging Contracts : Some Reflections on the Third International
Construction Law Conference. International Construction Law Review.
160
Consultation Document guidance notes.
161
Baird, Andrew. Pioneering the NEC System of Documents. Engineering, Construction and
Architectural Management. 1995. 2(4). p.254.
157
71
4.5.4
Employer to be the Core of the Process (through Project Manager)
Explicit and definitive roles and responsibilities are critical to the
organization of a project. Traditionally, Employer is to remain contractually passive.
Most employers now are armed with a large pool of professionals who are employed
to ensure smooth running of project after the award of contract. To resolve the
scenario of employers having its internal professionals that is required to be active
during its on-going works, a better approach could be taking the Employer to the
centre stage of the contracting process.
Research has found widespread agreement that the clarity of the roles and the
practicality of how the named individuals such as the Project Manager, Supervisor,
and Adjudicator are meant to function are an improvement on other existing forms of
contract. 162 On the resultant roles and responsibilities of NEC development, the
Project Manager is an extension of the Employer where his role is to manage the
project on behalf of the Employer, acting in the best interest of the Employer’s
business objectives. 163 The role of the Project Manager in the NEC contract is an
involved and demanding one.
NEC gives the Project Manager considerable authority, have single point
responsibility, and, above all, be empowered to make decisions. But NEC is
designed to prevent unreasonable behavior by spelling out how decisions are to
be made. Broome’s survey reveals that some project managers have expressed mild
relief that they are no longer both expected to act on the Employer’s behalf and to be
(simultaneously) independent. 164
162
Thompson, Roxene. (1998). Efforts to Manage Disputes in the Construction Industry : A
Comparison of the New Engineering Contract and the Dispute Review Board. Virginia Polytechnic
163
ECC, Guidance notes
164
Broome, J.C., and Perry, J.G. (1995). Experiences of the Use of the New Engineering Contract.
Journal of Engineering, Construction and Architectural Management, London, England, vol. 2 (4),
271-286.
72
4.5.5 Separation of the Role of Designer and Contract Administrator
The role of the Architect/Engineer as both an agent of the Employer and as
independent certifier continues to raise problems. These dual-functions may not be
best executed by the same person. For decades, the courts have tried to resolve the
conflict which arises in the building contracts between the Architect’s roles in
assuming duties and function on behalf of the employer vis-á-vis that other role in
some independent position between the Employer and Contractor.
In addition, projects have been increasingly complicated with an ever
increasing contractors, subcontractors and suppliers having parallel obligations
towards the completion of project in the ever decreasing time periods. These
difficulties are sometimes exacerbated by bias or self-interest on the part of the
Architect/Engineer. To address this scenario, the Architect/Engineer ought to be
relieved of quassi-judicial roles and managerial responsibilities.
The NEC in the context addresses the separation of roles of
Architect/Engineer between Project Manager, Supervisor, Designer and Adjudicator.
First to be noted is that Architect/Engineer is not mentioned in the NEC. They are
relieved of any quassi-judicial role played in traditional forms of contract. In
addition, the role of administration of the contract lies with the Project Manager,
having the full authority to deal on behalf of the Employer. Further to this,
Architect/Engineer functions are solely on the production of drawings and design
works. Thus, Project Manager will have direct access to advice from the
Architect/Engineer pertaining to design issues.
73
4.5.6 Supervisor
One of the most unusual features of the NEC is the way it separates the
functions of contract administration and supervision. It does this not by delegation of
powers but by specifying different roles for the Project Manager and Supervisor and
by apparently empowering them with independence from each other.165
The presence of a person in a support role for the Project Manager, is
common in many forms of contract. The Supervisor’s role “appears to lie
somewhere
between
that
of
the traditional Resident Engineer and Clerk of
Works”. 166 In regards to the roles and responsibilities described in the NEC, the
Supervisor, while acting for the Employer, mainly concerned and has a clear
technical role in deciding if what has been built is to the quality of work and defects.
Broome recounts from his research that some supervisors have complained
that the way the NEC contract defines their authority is a demotion of their former
role. However, the NEC makes it possible for the day-to-day project management
responsibilities for the running of the project to be delegated to the Supervisor.
Supervisors believe this compensates for the perceived demotion. 167
165
Eggleston, Brian.(1996). The New Engineering Contract, A Commentary. London: Blackwell
Science.
166
Broome, J.C., and Perry, J.G. (1995). Experiences of the Use of the New Engineering Contract.
Journal of Engineering, Construction and Architectural Management, London, England, vol. 2 (4),
p.271-286.
167
Cited from Thompson, Roxene. (1998). Efforts to Manage Disputes in the Construction Industry :
A Comparison of the New Engineering Contract and the Dispute Review Board. Virginia Polytechnic
Institute and State University : Virginia
74
4.5.7
Adjudicator
Adjudication surfaced in Sir Michael Latham’s Report
168
where Latham
proposed the abolishment of recourse to arbitration or litigation for construction
disputes and replace with adjudication. The Housing Grants, Construction and
Regeneration Act 1996 (HGCRA) in the United Kingdom provides a framework for
the implementation of the Act through a process of adjudication.
If negotiations in the contractual chain break down, the Adjudicator is
responsible for the settlement of disputes. The Adjudicator acts independently and
not as an arbitrator. The Adjudicator provides non-binding independent judgment of
any disputes that may arise within a contract. The Adjudicator is jointly appointed
and equally expensed by the Employer and Contractor. The impact of the role of
the Adjudicator is “akin to that of a nuclear deterrent - to encourage people to
sort of out their own disputes”. NEC contract participants are drawing some comfort
from the perception that if they make a decision, which is challenged, they
have an Adjudicator to decide whether the action was correct. By engaging the
Adjudicator, the parties of the contract avoid having to involve the Employer in an
expensive full-scale litigation or arbitration. 169
The NEC system requires parties to notify each other of disputes and resolve
them through adjudication without delay. If a dispute is not notified to the
Adjudicator within four weeks of arising, it cannot, in the future, be notified. Hence,
the parties are understood to have agreed the matter and it is no longer disputed. The
Adjudicator is an integral link in the organizational structure of the NEC.
168
Constructing the Team: Final Report of the Joint Review of Procurement and Contractual
Arrangements in the United Kingdom Construction Industry. London: HMSO.
169
Broome, J.C., and Perry, J.G. (1995). Experiences of the Use of the New Engineering Contract.
Journal of Engineering, Construction and Architectural Management, London, England, Volume 2
(4), 271-286.
75
4.5.8 Early Warning Procedures
One aspect of the NEC which has attracted much attention and
commendation is that it provides for early warning to be given of potential problems.
Loosemore has written that the Early Warning system is an improvement on JCT 80
which allocates specific monitoring responsibilities, since it encourages project
members to help each other by encouraging a recognition of the interdependency of
risks.” 170 Where the NEC differs from other forms, it may more effectively serve to
reduce disputes:-.
Many contracts provide that the contractor must give notice of claims when
the incident arises. The clause on early warning in the New Engineering
Contract deserves particular mention. In the context of variation orders, it
allows the Employer to reconsider such an order if the consequences of
which the contractor gives warning are out of proportion with the expected
advantages of the variation. At that stage, when the variation order is made,
it is often still possible to avoid or clearly circumscribe a dispute which, if it
arises later, may be bitter and costly. 171
NEC is explicit in its intentions and additionally it puts express sanctions on
the contractor for failing to comply. The procedure is designed to motivate the
parties to ensure, so far as possible, collaborative problem-solving. 172
One
interesting aspect of the early warning procedures is that they actually operate on
twin tracks. It creates a mandatory obligation on both the Project Manager’s and
Contractor’s parts to give an early warning by notifying the other in the designated
170
Loosemore, Martin. Dealing with the Unexpected Problems –Do Contracts Help? A Comparison of
the NEC and JCT 80 Forms. Engineering, Construction and Architectural Management, 1994. 1(2),
130.
171
Schneider, Michael. Mastering the Interfaces – Construction Contracts Drafting for Dispute
Avoidance. International Construction Law Review, 1993. 410.
172
Broome, J.C., and Perry, J.G. (1995). Experiences of the Use of the New Engineering Contract.
Journal of Engineering, Construction and Architectural Management, London, England, Vol. 2 (4),
p.271-286.
76
cases on matters which could increase the contract price, delay completion or impair
the performance of the works.
According to the twin track either Project Manager or the Contractor may
instruct other people to attend an early warning meeting. Thus, there are two
potential sets of instructions that may be issued, one mandatory with respect to
designated events, and one permissive insofar as who else may be instructed to
attend. The first instruction is also mandatory in terms of the obligation of the
contractor to obey it if given in accordance with the contract. The second instruction
remains permissive in the sense of instructing party being required to obtain the
consent of the other to the attendance of other people.
Disincentives are employed to ensure that the early warning procedure is
respected; in particular, regarding the first of the twin tracks procedures. The
assumption underlying the disincentives is that the early warning might have allowed
actions to be taken which would have reduced the effects of the event in terms of
cost and time or end quality of the works.
In brief, Contractors will have to thoroughly go through the details of the
Works Information at the start of a contract, looking to sort out inconsistencies and
ambiguities early on, rather than to discover them during construction. 173 On the
other hand, if the Contractor only makes the Project Manager aware of a
problem at the time of construction, it could be deemed his liability. Early
identification and resolution of a problem has avoided additional expenditure by both
Employer and Contractor.
173
Broome, J.C., and Perry, J.G. (1995). Experiences of the Use of the New Engineering Contract.
Journal of Engineering, Construction and Architectural Management, London, England, Vol. 2 (4),
p.271-286.
77
4.5.9
Accepted Programme
The Accepted Programme (Project Schedule) is central to the management of
NEC projects. Generally, it is updated at monthly intervals and includes among other
things, float time, construction methods, and resource levels for each operation. In
addition, the schedule gives the Employer milestone dates such as inspections,
access, and possession. The drafters of the NEC intended for the required schedules
to assist the Contractor to prepare and the Project Manager to assess the time and
cost impact of any potential compensation event, as well as giving much greater
confidence in forecasts of completion.
Lack of compliance with the Accepted Programme procedure places the
Contractor in a weaker position in the assessment of a compensation event.
Broome suggests that “The Contractor does not fully recognize the benefits of an up
to the date and realistic plan. As the initiator of the Accepted Programme, the
Contractor has the opportunity to take control and really drive the project. The
Contractor will be making the Employer and his Project Manager perform at a high
level in order not to hinder the project’s progress and will be able to claim
fair recompense if they do not meet their responsibilities”.174
Therefore, the NEC commands that both the Contractor and the
Employer carefully monitor the project. Hence, Contractor’s personnel at job site
level are required to prepare a more thorough and more carefully thought out
schedule.” The consensual observation among Contractors and Project Managers is
that “the NEC does not treat programming as an art, but purely as a science and
makes no allowance for the effect of general disruption to the critical path”. 175
174
Broome, J.C., and Perry, J.G. (1995). Experiences of the Use of the New Engineering Contract.
Journal of Engineering, Construction and Architectural Management, London, England, Vol. 2 (4),
p.271-286.
175
Cited from Thompson, Roxene. (1998). Efforts to Manage Disputes in the Construction Industry :
A Comparison of the New Engineering Contract and the Dispute Review Board. Virginia: Virginia
PolytechnicInstitute and State University.
78
The contractor therefore is motivated to do the work in accordance with the Accepted
Programme.
While some contractors complain of the effort required to prepare the
Accepted Programme, others do not resent having to do it, because of the benefits it
produces in terms of cost and time savings in evaluating compensation events and as
a tool for good project management. Broome’s research has discovered that there
is virtually complete agreement that if there are extra personnel costs, they are
outweighed by the benefits brought to the project. As a project manager stated “You
might as well pay a good project manager or planner at the time that he can do
something, rather than pay a claims type person at a later date”.
176
In short, NEC
has the following key features in regards of Work Programme:-
a)
Definition of “Accepted Programme” as the programme with contractual
effect. 177
b)
Contractor to be duty bound to update the Work Programme from time to
time as instructed by the Project Manager.
c)
Accepted Programme is important for fixing the date for possession of site
178
, affecting amount due for payment 179 and to determine contractor’s
entitlement to compensation events 180
d)
Until Contractor submit the first Work Programme for acceptance, 25% of
the amount due in interim payment will be withheld 181
176
Perry, John. (1995). The New Engineering Contract: Principles of Design and Risk Allocation.
Engineering, Construction and Architectural Management. Vol. 2(3), p.201.
177
ECC Second Edition Cl. 11.2 (14)
178
ECC Second Edition Cl. 33.1
179
ECC Second Edition Cl. 50.3
180
ECC Second Edition Cl. 63.3 and Cl 63.6
181
ECC Second Edition Cl 50.3
79
4.5.10 Work Acceleration
Traditionally, works are expected to be handed over on the completion date
as stated in the Contract Document. However, the need for acceleration is being
acknowledged by the industry. The NEC system provides the Project Manager may
instruct the contractor to submit a quotation for acceleration to achieve completion
before the completion date. However, this is not taken as to giving the Project
Manager to instruct acceleration. It is power only to seek a quotation. 182
Acceleration, as described under the NEC, invokes a change in obligations of
the parties which can only be made by agreement. What is intended is that the
contractor can be asked to state his price for taking on the contractual obligation of
finishing early and putting in hand the necessary resources. The NEC puts the
contractor under an obligation to submit a quotation when so instructed or to give his
reasons for not doing so. However, there is no sanction in the contract for failure by
the contractor either to provide a quotation or to give his reasons. In brief, the NEC
pertaining to acceleration has the following features:-
a)
Acceleration means bringing the completion date forward and not just
speeding up works
b)
Project Manager has full authority to arrange acceleration.
c)
Acceleration cannot be imposed by the Project Manager without prior
quotation and agreement from the Contractor.
d)
A quotation to be submitted by the Contractor shall include a proposed
change to the price and completion date as well as a revised Work
Programme
182
Eggleston, Brian. (1996). The New Engineering Contract, A Commentary. London: Blackwell
Science.
80
4.5.11 Compensation Events
Compensation events written under the NEC system is a radical departure
from traditional principles of standard forms of contract. It relies on the Work
Programme for an assessment of actual cost and also requires a Revised Programme
for every event involving delay. The NEC Guidance Notes define Compensation
Events as “events which, if they occur, and do not arise from the Contractor’s fault,
entitle the Contractor to be compensated for any effect the events has on the Prices
and the Completion Date.”
In other words, the contractor, when a defined event occurs which is at the
Employer’s risk, is entitled to extra payment and/or a delay to the completion
date. The entitlement is determined through a quotation by the Contractor for the
time and cost impact of the problem and its solution. The Compensation Event is
then implemented upon the Project Manager notifying the Contractor of an
accepted entitlement. The NEC listed 18 causes which entitle the Contractor to
additional payment as follows:- 183
Compensation Events identified in Clause 60.1 NEC Second Edition
1.
The Project Manager gives an instruction changing the Works Information except
• a change made in order to accept a Defect or
• a change to the Works Information provided by the Contractor for his design,
which is made at his request or to comply with other Works Information provided
by the Employer.
2.
The Employer does not give possession of a part of the Site by the later of its
possession date and the date required by the Accepted Programme.
3.
The Employer does not provide something, which he is to provide by the date for
providing it required by the Accepted Programme.
4.
The Project Manager gives an instruction to stop or not to start any work.
5.
The Employer or Others do not work within the times shown on the Accepted
Programme or do not work within the conditions stated in the Works Information.
183
ECC Second Edition Cl 60.1
81
6.
The Project Manager or the Supervisor does not reply to a communication
from the Contractor within the period required by this contract
7.
The Project Manager gives an instruction for dealing with an object of value or of
historical or other interest found within the Site.
8.
The Project Manager or the Supervisor changes a decision, which he has
previously communicated to the Contractor.
9.
The Project Manager withholds an acceptance (other than acceptance of a
quotation for acceleration or for not correcting a Defect) for a reason not stated in this
contract.
10. The Supervisor instructs the Contractor to search and no Defect is found unless the
search is needed only because the Contractor gave insufficient notice of doing
work obstructing a required test or inspection.
11. A test or inspection done by the Supervisor causes unnecessary delay.
12. The Contractor encounter physical conditions which
• are within the Site
• are not weather conditions
• which an experience contractor would have judged at the Contract Date to have
such a small chance of occurring that it would have been unreasonable for him to
have allowed for them.
13. A weather measurement is recorded
• within a calendar month
• before the Completion Date for the whole of the works
• at the place stated in the Contract Data the value of which, by comparison with
the weather data, is shown to occur on average less frequently than once in
ten years.
14. An Employer’s risk event occurs.
15. The Project Manager certifies take over of a part of the works before both Completion
and the Completion Date.
16. The Employer does not provide materials, facilities and samples for tests as
stated in the Works Information.
17. The Project Manager notifies a correction to an assumption about the nature of
a compensation event.
18. A breach of contract by the Employer which is not on of the other compensation
events in the contract.
Table 4.5.11 : Lists of Compensation Events
82
Broome reports that the clause has been extensively tested on various
contracts and has not produced any significant problems. 184 From his research,
Broome discovered that construction participants have found that the list of
Compensation Events in one section, is a general improvement in clarity, than is the
case with other forms of contracts. Thus, compared to other forms of contracts, a
higher level of front-end administration is needed to prepare and evaluate the
time and cost impact of Compensation Events.
Therefore, due to the mechanisms in the NEC system, a major effort has
been involved in the earlier stages of contract negotiations to forecast labor
costs for particular workers which is required in order to estimate total costs for
Compensation Events. 185 As an example, experienced employers are now looking
to agree standard rates for different categories of labor; either early on in the
contract or before the contract is signed. Agreeing to the problem, defining its
solution and stating assumptions that are to be made before the Contractor prepares
his quotation, rather than after, is the result of the NEC objective to be an impetus to
good project management.
Most importantly, from his research, Broome discovered that “almost all
NEC contracts appear to be achieving much earlier settlement of the final account
than under other forms of contract. Settlement is commonly achieved within a few
months of completion, which is an indicator that the compensation event
procedure is achieving its objectives” without arbitration or litigation. Broome infers
that the Compensation Event procedure has had a significant impact on construction
practices. 186
184
Cited from Thompson, Roxene. (1998). Efforts to Manage Disputes in the Construction Industry:
A Comparison of the New Engineering Contract and the Dispute Review Board. Virginia: Virginia
Polytechnic Institute and State University.
185
Broome, J.C., and Perry, J.G. (1995). Experiences of the Use of the New Engineering Contract.
Journal of Engineering, Construction and Architectural Management, London, England, Vol. 2 (4),
p.271-286.
186
Cited from Thompson, Roxene. (1998). Efforts to Manage Disputes in the Construction Industry:
A Comparison of the New Engineering Contract and the Dispute Review Board.
83
4.5.12 Dispute Resolution
The NEC is premised upon the present need for greater co-operation among
parties to contracts and to achieve the reduction of disputes as well. In a large survey
of construction professionals researchers asked respondents to rate forms of contract
according to their perceived expectancy of disputes using it. The NEC form was
ranked third overall in a list of fourteen standard forms suggesting a very low
expectation of disputes. 187
The inclusion of a dispute avoidance tier reflects one of the original
intentions of NEC drafters:-
One of the motivation behind the NEC is also to reduce the occurrence of
disputes. However under the NEC, possible sources of disputes are treated in
fundamentally different way form in more conventional contracts. Under the
NEC, the intention is that disputes are to be avoided through good project
management practice, which reduces the incidence of conflict. While it does
address the matter of how disputes may equally be resolved, its primary
emphasis is on how they can be avoided. 188
Where it is understood that an issue has been problematic or productive of
disputes, attention or special provisions has often been given to it in the NEC. The
first heading of the NEC Second Edition 1995 is “Settlement of Disputes”. In this
regard, the heading sets forth a clear policy choice on the part of the drafters who
made a firm stand on the concept of adjudication as the first tier of a two-tier
procedure for dealing disputes under the NEC.
187
Fenn, Peter et al. (1997). Conflict and Dispute in Construction. Construction Management and
Economics. Vol. 15(6), p.513-518.
188
Rooke, John and Seymour, David. (1995). The NEC and the Culture of the Industry: Some Early
Findings Regarding Possible Sources if Resistance to Change. Engineering, Construction and
Architectural Management, Vol. 2(4), p.297
84
Dispute resolution under the NEC has the following features which is revolutionary
against traditional standard forms of contract:- 189
a)
Any dispute arising under or in connection with the contract is submitted to
and is settled by the adjudicator.
b)
The adjudicator settles disputes as an independent adjudicator and not as an
arbitrator.
c)
The adjudicator is required to settle the disputes by notifying the parties of his
decision, together with reasons, within the time allowed by the contract.
d)
If the parties are dissatisfied with the decision of the adjudicator, they may
refer their disputes to a tribunal (Review by the Tribunal) within four (4)
weeks of the adjudicator’s decision.
e)
The adjudicator’s decision is final and binding unless revised by the tribunal.
f)
The nature of the tribunal is necessary to be named in the Contract Data and
must be agreed upfront before work commences.
g)
Reference of the dispute to the tribunal should be a condition precedent to, if
not a substitute for, the parties’ right to litigate.
h)
The powers conferred on the tribunal include the power to review and revise
any decision by the adjudicator and action or inaction of the project manager.
The most distinct aspect to be noted pertaining to the above is that contracting parties
have agreed beforehand as to how they would want to settle their disputes. Another
point to be observed is that there is a strict time frame to solving disputes under the
NEC system.
189
Eggleston, Brian. (1996). The New Engineering Contract, A Commentary. London: Blackwell
Science.
85
4.6
Conclusion
The NEC was an ingenious product of Dr. Martin Barnes with clearly
articulated drafting objectives of flexibility; clarity and simplicity; stimulus to good
management; role integration; risk allocation; role of co-operation at law and the
NEC; and prevention. The NEC has introduced some salient aspects as follows:-
•
Language
•
Mutual Trust and Co-operation
•
Supporting Materials – Guidance Notes and Flowcharts
•
Employer to be the Core of the Process (through Project Manager)
•
Separation of the Role of Designer cum Contract Administrator
•
Role of Supervisor
•
Role of Adjudicator
•
Early Warning Procedures
•
Accepted Programme
•
Work Acceleration
•
Compensation Events
•
Dispute Resolution
Despite the unconventional contracting practices of the NEC, popular
sentiment among engineering and construction industry participants is that “The
NEC is an improvement on other forms of contract. 190 Early experience is proving
that this new form of contract is making considerable contribution and impact to
improvements in the ways that projects are managed, thus benefiting the productivity
of the industry and the competitiveness of its clients. Understanding and appreciating
the innovations and salient aspects of the NEC in the industry is therefore critical
to its success.
190
Broome, J.C., and Perry, J.G. (1995). Experiences of the Use of the New Engineering Contract.
Journal of Engineering, Construction and Architectural Management, London, England, Vol. 2 (4),
p.271-286.
CHAPTER 5
POSSIBILITY OF THE IMPLEMENTATION
OF NEC IN MALAYSIA
CHAPTER 5
POSSIBILITY OF THE IMPLEMENTATION OF NEC IN MALAYSIA
5.1
Introduction
Based on the literature review carried out at the initial stage of my study, I
find it revolutionary the NEC Family of Contract advocated by Sir Michael Latham
could be a possible long term solution to eradicate some contractual problems in the
Malaysian construction industry. This segment carries an assessment of the
industry’s perception of how far the NEC’s concept is acceptable at this point of
time, which could drive the possibility of implementing the NEC in the Malaysian
construction industry.
Due to the complexities of the subject discussed, there were strong doubts
that the degree of assessment to be carried to the industry in general. After a
thorough discussion with my Supervisor, Assoc. Prof. Dr. Maizon Hashim, it has
been agreed that a structured interview will be conducted with highly prominent
professionals within the construction industry. In order to gauge a good assessment,
the structured interview is particularly targeted at professionals who specialize in the
interpretation and application of standard forms of construction contract in the
Malaysian construction industry.
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5.2
Sample Selection
All respondents are well respected in various fields of specialization. The
following is just a brief account of the professionals of their various background and
professional affliction:-
a)
Mr. Lim Chong Fong
Mr. Lim Chong Fong is a partner of a law firm involved primarily in
construction law (Messrs Azman, Davidson & Co.). He is a Chartered Quantity
Surveyor and Chartered Builder and is also admitted to the Malayan, English and
Brunei Bar. He is presently involved principally in construction law and dispute
resolution as Counsel in both arbitrations and the Courts. He also acts as Arbitrator
and Adjudicator. Mr. Lim is a past Deputy Chairman of the Chartered Institute of
Arbitrators, Malaysia Branch and has contributed to the Construction Law title for
Halsbury’s Laws of Malaysia and Malaysian Court Forms for Arbitration and
Construction Law titles. Mr. Lim Chong Fong has also authored the book “The
Malaysian PWD Form of Construction Contract.
b)
Mr. Amran Mohd. Majid
Mr. Amran Mohd. Majid is currently attached with the Tender, Contract and
Cost Section, Contract and Quantity Surveying Branch, Public Works Department,
Malaysia. He is a Registered QS and Member of the Institution of Surveyors
(Malaysia). He has an Academic Degree in Law from University Malaya. Mr. Amran
also sat and passed the professional examinations of Certificate in Legal Practice
(CLP) from the Legal Profession Qualification Board of Malaysia. He has presented
numerous papers at both public and private seminars, mainly on contracts.
88
c)
Mr. Jerry Sum Phoon Mun
Mr. Jerry Sum’s experience lies in project implementation and administration
as well as contract management. He specializes in the interpretation and application
of building contracts. He has been involved with project documentation,
administration and construction for more than 40 years. He takes a special interest in
aviation projects and has served as Project Director on two international airport
projects - the Kuching International Airport and the Kuala Lumpur International
Airport. His career began in Australia in 1963. He returned to Malaysia in 1966 and
worked as a Project Architect for the government. Mr. Jerry Sum also acts as an
Arbitrator and a Member of the PAM Contract Review Committee. He is currently
the Project Director of Arkitek MAA..
d)
Mr. Low Khian Seng
Mr. Low Khian Seng has practised as a Quantity Surveyor for over 35 years
and is one of the founders of the firm of Baharuddin Ali & Low Sdn. Bhd., a
Chartered Quantity Surveying firm. He is a Fellow of the Institution of Surveyors
(Malaysia), a Fellow of the Royal Institution of Chartered Surveyors, a Fellow of the
Royal Institute of Arbitrators, a Member of the Malaysian Institution Institute of
Arbitrators and a Member of the Singapore Institute of Surveyors and Valuers.
He is on the Panel of Arbitrators of KLRCA, was a past committee member
of the Malaysian Institute of Arbitrators, and when he was co-opted member of the
PAM Arbitration Committee, he helped draft the PAM Arbitration Rules 2003
Edition. Mr. Low has had international experience spanning over Europe and the
Asia Pacific region specifically in the United Kingdom, Hong Kong, Brunei,
Singapore and Malaysia. He is presently involved with the PAM Contract Review
Committee and for the past four years has participated in re-drafting a new PAM
Contract.
89
e)
Dr. Syed Alwee Alsagoff
Dr. Syed Alwee is the Chief Executive Officer of CIDB E-Construct
Malaysia. He comes from a multidisciplinary background holding professional
construction, law and economics degrees. He has had over 16 years international
experience spanning over Europe and the Asia Pacific region specifically in the
United Kingdom, Holland, Italy, Singapore, Hong Kong, Australia and Malaysia.
These include serving as a Specialist Analyst to Kajima Corporation (Japan),
Advisor to Trevi Construction International (Italy), Currie and Brown (UK and
Holland) Lecturer in the University of Salford (England) and a Consultant with
High-Point Rendel (Singapore).
f)
Ir. Oon Chee Kheng
Ir. Oon Chee Kheng is a Fellow of The Institution of Engineers, Malaysia
(IEM) and is a registered professional engineer in the civil engineering discipline
with the Board of Engineers, Malaysia. Ir Oon is the former Honorary Secretary of
IEM, past chairman of IEM Legal Advisory Panel, IEM Sub-Committee on Dispute
Resolution Practice and IEM Sub-Committee on Engineering Contracts. Ir Oon has
also served in different capacities in the Construction Industry Development Board,
Malaysia (CIDB) and Master Builders Association Malaysia.
He is a member of the drafting team that produced the CIDB Standard Form
of Contract for Building Works and the CIDB Standard Method of Measurement for
Civil Engineering Works. He is also the Chairman of the CIDB drafting panel for the
proposed CIDB Standard Form for Civil Engineering Works and is commissioned
by IEM to produce the second edition of IEM Conditions of Contract for Works of
Civil Engineering Construction.
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5.3
Comments from Structured Interview
The structured interviews were conducted at the offices of various
respondents. The respondents were briefed with a set of questions relating to the
topic surveyed, namely the key features of the NEC which differ from traditional
Standard Forms of Contract. However, it must be emphasized that only certain
aspects of the NEC was included in the assessment where respondents felt to be the
main areas to be concerned which could appropriately be addressed as radical
changes for Standard Forms of Contract in the Malaysian construction industry.
The comments from the structured interview are presented to preserve
confidentiality of the respondents selected. Thus, this segment will be presented with
no mention of names of the respondents. The following write up is based on the
comments and perception on the seven (7) topics raised during the structured
interview followed by a general view on advocating the idea of issuance of a contract
as a possible long term solution that will help to eradicate some of the core
contractual problems in the Malaysian construction industry.
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5.3.1
Language of a Contract Being “Simple Plain English”
NEC is said to be the first Standard Form of Contract that attempted the use
of simple plain English in a way it is written straightforward, without too long
sentences and few wordings. Respondents were asked whether Standard Forms of
Construction Contract should be drafted in a simple language, away from legalistic
language found in usual standard forms.
When the question was poised to the respondents, none opposed to any
attempt to simplify the language in Standard Forms of Construction Contract. One
respondent commented that at times no matter how simply set out a contract, it will
sooner or later throw up abstract legal issues which will need complex ideas and
analysis and language to reach a conclusion. The respondent mentioned plain English
has much to recommend, particularly when it is borne in mind that a contract has to
be read by, used by those who are not legally qualified.
One respondent is of opinion that plain English should help the parties in the
contract to achieve mutual understanding and expectations. On the same spectrum,
this respondent voiced his criticism towards the PWD Standard Form of Design &
Build / Turnkey Contract (PWD Form DB/T) (2000 Edition) where the design
obligation’s clause was found to be too many words in one sentence, resulting it to
become obscure. Nevertheless, he voiced his concern as to the degree of simplicity.
On the other hand, one respondent even though voicing his support in the
attempt to simplify the language commented that a contract being a legal document
has to be structured in some form of legal language. The respondent voiced out his
perception to simple language contract may not accurately convey the exact intention
of parties. Agreeing along the same line, another respondent said that complex legal
expressions were not invented as an obscure code to baffle the uninitiated, but
instead grew up as the most precise way in which complicated propositions could be
92
stated, preferably so that both the person drafting them, and the judge interpreting
them would find the same meaning in them.
One respondent, even though voicing his support for a plain language
contract, commented that legal interpretation in construction contracts is a trite law
and the purpose of interpreting any contract is to ascertain the true intention of
parties. He further emphasized that the interpretation of condition and clauses in
contract is a question of law, thus in the attempt to simplify the language, one must
be very careful to encompass all aspects or even loopholes of the contract.
Meanwhile, one respondent opined that having the language of a contract
being simple plain English is a good perception. However, this respondent expressed
his concern as it is not easy to draft simple plain language. The respondent has some
reservation as to simpler style of drafting where he emphasized that in the attempt of
simplifying the language, one may miss out the content of the contract.
As to the effort of simplifying the language of a contract, one respondent
made it firmly that there must be a balance between simplicity and legal language.
One respondent reminded that the language should not be too simple to the extent
that it gives a double meaning. According to this respondent, in simplifying the
language of the contract, one has to be very precise especially where construction is a
tremendously complicated process.
On the whole, all respondents agreed the language in Standard Forms of
Construction Contract can be simplified to a certain degree provided it conveys the
true intention of parties. On my personal point of view, extreme language mainly
derived from archaic language drafted by lawyers lacking or no experience of the
needs of construction project. The suggested idea that is to draft a contract in “simple
plain English”, I believe will minimize the incidence of disputes arising from
ambiguous meanings.
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5.3.2
Acceptance towards the idea of Adjudication as a form of Alternative
Dispute Resolution
Standard Forms of Contract 1 provide arbitration as a means of dispute
resolution. In all arbitration agreements 2 in the standard construction contracts, there
are provisions to the effect that an arbitral reference can only commence after the
completion or alleged completion of works. It is to be appreciated that in some
situations this is not favoured either of both the parties to the contract. It is for this
reason that the NEC advocates the use of (contractual) adjudication and for a
construction contract to incorporate a provision to this effect. In PAM 2005/2006
amendments, it is understand that there is an inclusion of adjudication.
Adjudication in simple wordings means during the on going of the project,
should there be any dispute it will be referred to an Adjudicator who will deliver his
decision in a given time frame. Adjudication in various countries at this point of time
whether in United Kingdom, Australia or New Zealand varies in implementation.
Currently in the local industry, there is a move towards statutory adjudication.
Respondents were asked on their views towards the concept and effectiveness of
adjudication in resolving dispute.
All respondent voiced their entire support for adjudication as a resolution to
disputes arising during the construction process with the exception of two. On the
other spectrum, one respondent speaking of arbitration, commented that it has not
been very successful as many people have complained it takes too long and
expensive even though it is a preferred way than resolving a dispute through High
Court. This respondent vouched for adjudication would solve to some extent for
problem of delayed justice.
1
Clause 34 for PAM 98, Clause 55 for PWD 203, Clause 47.3 for CIDB 2000 and Clause 55 for IEM.
CE 1/89.
2
The respective arbitration clauses.
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Another respondent is critical over the concept while the other is “neutral”
having his own merits and demerits. The respondent felt that this form of alternative
dispute resolution can be used where the main issue is to facilitate cash flow but at
the same time the respondent commented that the implementation of adjudication
will create enormous claim culture as it turned out to be abusive in England.
One respondent commented that adjudication providing some short term
finality could be an answer to issues arising during the on going of construction. This
respondent is of opinion that this form of dispute resolution has its merits in term of
speed in resolving dispute. However, this respondent is equally concerned as he
voiced his perception onto the effectiveness of adjudication. He commented that
adjudication will only be effective if the court supports it that is by having a special
court which can sit quickly and pass decision.
Another respondent agreed along the line commented that whether the
concept is workable will depend upon the intention of the parties in dispute. This
respondent believed that arbitration took a long time mainly because the parties
involved does not have the intention or unwilling to settle their disputes. One
respondent even though voice his strong support for adjudication, reminded that
adjudication, arbitration and mediation are means of resolving disputes, not means of
avoiding dispute. He proceeded to suggest that there are other methods of
(alternative) dispute resolution such as partnering which may be worth considering
and it may be time for standard construction contracts to look to this direction.
In short, the response towards the idea of adjudication as a form of alternative
dispute resolution is encouraging mainly due to it provides short term finality. In my
personal perspective, I strongly feel the proposed idea of having Adjudication as a
form of alternative dispute resolution will succeed in Malaysia due to its quick
solution to issues arising during the on going of construction. By engaging the
Adjudicator also, the parties of the contract can avoid having to involve the
Employer in an expensive full-scale litigation or arbitration.
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5.3.3 Separation of Architect’s Role of Designer cum Contract Administrator
Traditionally under PAM Form of Contract, the Architect being the designer
of the Project is the Contract Administrator. However, the issuance of CIDB 2000,
the role of Superintending Officer no longer automatically resides with the Architect.
In fact, it was mentioned 3 that the Superintending Officer has to be a full member of
a professional body related to the construction industry. Hence, provided that person
is professionally qualified in the construction field, he may resume to the role as
Superintending Officer, a position long rested with the Architect.
For decades, courts have tried to resolve the conflict which arises in the
building contracts between the Architect’s roles in assuming duties and function on
behalf of the Employer vis-á-vis that other role in some independent position
between the Employer and Contractor. There have been views that the dual role may
not best be executed by the same person, namely the Architect in this sense. The
argument is not to rule out the Architect to be the Superintending Officer but to look
into separating the role to two different parties.
Respondents were asked whether the Architect’s role of designer cum
contract administrator of the project should be separated, relieving them from the
quasi-judicial role played in traditional forms of contract. One respondent
emphasized the potential problem lies with the contracts administrator when he is
playing, or entrusted with the role of, a certifier who lacks impartially. The
respondent agrees to the separation of the dual role only for complicated and large
projects where there is a potential of dispute. He further commented that it would add
unnecessary costs to the Employer for small size projects. Another respondent
opined that the contract administrator may not necessarily be the Architect.
Nevertheless, he is concerned over the technical knowledge that the contract
administrator must possess to ensure the quality of work done.
3
Clause 1 CIDB 2000
96
At the same spectrum, one respondent commented that the role should be
separated, giving an example where the Extension of Time (EOT) clause, there a
provision where if there is a late instruction by the Architect to the late issuance of
drawing, the provision could be abused to cover consultant’s mistake. In that sense,
an Architect might tend to be less impartial in deciding giving more time or less time
for his own mistakes. One respondent agrees over this and suggested that it is
question of how honest the Architect when he tries to suppress the reasons for EOT
and pass it to other reasons.
One respondent, however, disagreed over the separation issue, subsequently
gave reasons that the Architect being the designer is also the creator of the building,
where he knows best the quality of the building needed to be. Hence, he opined that
the Architect should be in the best position to administer the contract. Another
respondent agreed along this line further suggested that there should be no harm for
the Architect to be impartial provided they are not overloaded with projects on hand.
Another respondent takes the view that the Architect under the PAM Form of
Contract determines the acceptability and quality of the work, where the Architect
certifies upon satisfaction. His strong belief is that this function must still be taken by
the Architect instead of anybody else because the Architect is also the qualified
person under the by-Laws, for instance to issue the certificate of compliance. The
respondent feels if the function is to be separated, it doesn’t work anymore.
One respondent however voiced his concern that the argument should not be
at the perception of the separation itself whether the Architect should or should not
be the contract administrator, but what is important is the person who is assuming
that role. In defence, the respondent made it clear that person must have two
qualities; having the ability to be impartial and at the same time adequately trained in
contract administration. This respondent sees the necessity to separate the dual role
due to most Architect being good designers may not adequate in assuming the
contract administration work.
97
In brief, under the NEC, the contract administration lies with Project Manager
while the Architect/Engineer functions are solely on the production of drawings and
design. In my personal opinion, the NEC takes a good stand of relieving the
Architect/Engineer of quassi-judicial roles and managerial responsibilities in
addressing the scenario of sometimes exacerbated by bias or self-interest on the part
of the Architect/Engineer. Taking a neutral stand on the issue of separating the dual
role, perhaps what is utmost important is the integrity of the contract administrator
not to be influenced by the owner, hence playing that role effectively.
5.3.4
Employer to be the Core of the Construction Process
Traditionally, Client is to remain contractually passive under the PAM
Standard Form of Contract whereby his primary role is to pay upon issuance of
Interim Valuation Certificate by the Architect and to order variation when necessary.
The NEC takes an approach of taking the Employer to the centre stage of the
contracting process through the Project Manager, where his role is to manage the
project on behalf of the Employer.
Respondents were asked about the possibility of Client to be the core of
construction process and the team headed by a Project Manager as the driving force
of the construction process while having the Architect alongside to resolve
contractual and quality issues. None rejected to the idea but most of the respondents
have their reservation towards the degree of Client’s involvement.
One respondent in fact mentioned that it is the case in all standard forms that,
upon the execution of the contracts, the Employer hardly plays any role other than
payment, and is limited to have some say on matters relating to termination of
employment and others. Agreed along the same line, another respondent suggested
98
that Client ought to take the centre stage of the construction process, arguing that
Client’s involvement merely by project brief is insufficient and is limited because of
its own capacity. This respondent opined that the Client’s active involvement would
be beneficial when the Client have a better understanding of the building as
compared to a newly appointed Architect for that project.
Meanwhile, one respondent has a neutral stand as to the possibility of having
the Client to be the core of construction process having his own merits and demerits
would depend upon the nature of the Client itself whether he is a regular developer
who knows more than the contractor or the other around. This respondent
commented that in the sense where the Client depends on consultants to run the
project, one cannot expect much participation from the Client. As for repeated Client
who does repeated development, the respondent thinks in variably, those Client can
be very much involved.
One respondent commented that if a client desires more involvement, the
drafting therefore should be more in a partnering agreement, rather than a Design and
Build in a traditional sense. This respondent reminded that for Design and Build, one
must not forget legal constitution coming in, emphasizing that arguably the Client is
interfering the contract when the he starts getting involved in the process. The
respondent added if a Client wants to have participation yet without assuming
obligations, he felt the drafting has to be clearly and very tightly drafted.
A few respondents voiced their support for this concept provided the Client
has the expertise in managing process. One respondent went further to say that Client
himself can take the managing role or through Project Management Consultancy. On
another spectrum, one respondent opined that even with client’s participation, no
issue can be resolved if a Client does not crystallize what he wants upfront
substantially. This respondent further commented that this can be done by Client’s
early participation with consultants or contractor for Design and Build before
construction during the design development stage.
99
On the whole, all respondent agree to a certain extent, a Client should be the
core of the construction process. My general perception on this topic is where most
employers now are armed with a large pool of professionals employed to ensure
smooth running of project, it is a rationale approach by taking the Employer to the
centre stage of the contracting process to resolve the scenario of employers having its
internal professionals that is required to be active during its on-going works. I
strongly believe that the Client’s active involvement would lead to a betterment of
the industry provided he has a good understanding of the building and the expertise
in managing the project.
5.3.5 Variation Order to be agreed prior to works at site
The concept of variation is simply this: the Contractor has been given a
certain price to execute and complete a certain work and what is not covered for in
price is variation to the contract. Traditionally, Variation Order is to be subjected to
re-measurement when work is completed later. Meanwhile, agreeing to a problem,
defining its solution and stating assumptions that are to be made before the
Contractor prepares his quotation, rather than after is the result of the NEC.
Respondents were asked of their opinion as to pre-agreed variation.
One respondent rejected this proposal as being impractical from the point of
hindering the ongoing of construction. Another respondent stated that legally and
contractually, a contractor has no right to insist rates to be agreed before proceed
work. The others respondent agreed in principle to the concept of pre-agreed
variation but to some extent of reservation. One respondent opined that the concept is
good on the face of it where Variation Order can be agreed prior, like what the NEC
is suggesting where it is instructed and carried out.
100
One respondent is in favour on variation order to be agreed prior to work at site. In
defense, he believed there will be minimal incidence of dispute and at the same time
Variation Order will be certified and paid promptly to be progress payment.
However, he foresees the problem of pre-agreed variation where there might be
difficulty sometimes in getting the price resolve up-front before variation works are
done. Agreeing along the line that pre-agreed variation can minimize dispute, one
respondent felt that this concept fits on client’s initiated changes.
Another respondent has the reservation as to pre-agreed variation where it
should only be confined to the rates of work to be carried out. According to this
respondent, work has to be re-measurable upon the completion of works. On the
whole, most respondents agreed in principle to the concept of pre-agreed variation
but to some extent of reservation.
In my own view, I suggest where Variation Order can be agreed prior to
works at site, therefore this should remain the way. Failing which and then referring
back to traditional way of re-measurement upon completion of works. In other
words, the Contractor should carry out his work at the first place, subsequently going
to the Superintending Officer for valuation or adjudication straightaway.
5.3.6
Flexibility of a Standard Form of Contract taking into account and
responding to ever-changing needs
Flexibility is the main articulated drafting objective NEC where it intends to
be a responsive form that takes into account and responds to ever-changing needs.
Respondents were asked on their views whether a Standard Form of Construction
Contract should be so flexible that it can be used at all the interfaces of a project,
101
able to applied in all contracting methods and also meant to be used for every type of
engineering and construction work with minor adjustment.
When this question was poised to the respondents, most of them agree that a
Standard Form of Contract should be flexible in responding to ever-changing needs.
However, the respondents do not feel that a Form should be so flexible that it can be
used at all the interfaces of a project. One respondent out rightly rejected this
proposal as being impractical even though commented this being a good concept.
The respondent further highlighted the Kuala Lumpur International Airport (KLIA)
project involving 58 packages where operation does not happen concurrently and at
the same time involves participation of different consultants.
Another respondent agreed along this line suggested that a Standard Form of
Contract should not be so flexible to the point that it would become meaningless.
This respondent commented that having such a form could lead to much confusion if
something cross out in the contract and do not think such a flexible form will be
user-friendly to the industry. On the other hand, a few respondents opined that
having such a flexible form could be done for major works.
One respondent believe there is no harm to have such an ideal Form.
However, the respondent voiced his reservation as there is a lot of political and
vested interest in the construction industry. The respondent went further to suggest
having a shorter and easier Form such as a Design and Build Form with option
modules or add-on for financing which could serve as betterment to the industry.
On the whole, some of the respondents voiced their support for an ideal
contract meant to be used for every type of engineering and construction work with
minor adjustment to a certain extent. Some of the respondents however, even though
recognizing flexibility as a good concept felt the idea as almost impossible to be
realized practically.
102
In my personal point of view, the industry is moving towards sophistication
and there is a requirement for cross-disciplinary forms for multidisciplinary projects.
Even though most respondents rejected to the proposal to having a Standard Form of
Construction Contract that is flexible to the degree it can be used at all the interfaces
of a project, nevertheless, it is believed to be possible to achieve the diversity of
project organization by focusing on commonality in a small number of core and
option clauses.
5.3.7
Acceptance towards the CIDB Standard Form of Contract 2000
This dissertation is centred upon the possibility of introducing NEC to the
Malaysian construction industry. The NEC is found to have similarities with the
CIDB Standard Form of Contract 2000 in term of providing excellent
management manual such as guidance notes that accompanied the contract.
Respondents were asked about their views on the merits of the CIDB Standard
Form of Contract and its degree of usage.
One respondent opined that it is quite well drafted and mentioned that his
firm has a completed project that uses this form. However, this respondent went
further to comment that it has not been widely used due to the long presence of
PAM Form and PWD 203A being the “tried and tested” forms in the industry as
well as other in-house Form of Contract.
Another respondent commented that there were a few projects completed
successfully using this Form. The respondent commented that the Form addresses
certain fear or injustice for contractor. He further highlighted the CIDB Standard
Form of Contract as compared to PAM Standard Form of Contract such as
systematically structured with procedures laid down, more balanced risk
103
allocation, language of the contract being simpler and the Form is more up to date
just to name a few of its merits.
A few other respondents however felt the CIDB Standard Form of Contract is
less friendly and too procedural with too many clauses in the contract. The
respondents who agreed along this line however noted that it is an improved
Form. One respondent claimed that in doing comparisons of Standard Forms of
Contract in the local construction industry, he found the acclaimed Form to be the
fairest among other Standard Form of Contract in the market.
However, regarding to the degree of usage on the CIDB Standard Form of
Contract, most respondents are in consensus that there is a limited usage of the
form due to more equitable rights given to both employer and contractor. The
respondents opined that the Client being the paymaster of any project would
logically opt for a form that is more favourable to them. One respondent
commented that in situation where Contractors were to counter proposed to use
the CIDB Form, contractors cannot get jobs. In that sense, the respondent felt that
the Contractor does not have the leverage to push forward to use the CIDB Form.
However, I believe that given incentives in using the Form, there should be a
wider usage.
5.3.8
Other Comments
Lastly, respondents were asked on their general views on a possible solution
to the problems in the construction industry. Respondents were also asked of their
perception on whether a contract can be a “real time” solution to the problems in the
industry as this thesis is centred upon the introduction of a revolutionary Standard
104
Form of Contract in trying to address the shortcomings of standard forms of contract
and some pertinent issues in the construction industry.
Respondents believed that the construction industry in Malaysian have not
yet reach maturity of developed countries. One respondent commented that so long
there are Contractors who are willing to take jobs from Client who are not paying, no
effective contract can eradicate problems in the construction industry. None of the
respondents in fact believed that a Standard Form of Contract can actually resolve
problems in the industry.
On the legislative stand, one respondent voiced his concern to the outdated
Contracts Act 1950. Another respondent informed that for the purpose to meet the
needs of the Malaysian construction industry, the revised PAM Form of Contact
2006 is now at its final stage of drafting and will be ready for publication shortly.
One respondent commented that there is too much vested interest in the trend
of releasing Standard Form of Contract while another respondent opined that there is
no ideal contract at the moment and went further emphasizing it is most important to
know the implication of a Form of Contract. On one other spectrum, one respondent
felt ideas such as partnering could be seen as a viable solution where a contract is
used as a backdrop only in the event of problem arising.
Another respondent also looked at partnering as a proactive method to resolve
issues before they erupt into an adversarial position. This respondent looked into
partnering as an effort by both parties to forge an understanding on implementation
of the project based on intrinsic characteristics of the project. He further commented
that this is in contrast to the rigidity of traditional procurement path where both
contracting parties enter into a contract based on available Standard Form of
Contract.
105
5.4
Conclusion
While the industry acknowledges the problems surrounding the construction
process, there is no strong consensus to make a radical change to address the issues.
The research is centred upon the possibility of implementing the NEC in the
Malaysian construction industry. The study advocates the idea of issuance of a
contract that will help to eradicate problems in the industry. The results indicated that
the objective of this research failed. Nevertheless, some of the NEC’s core tenets
receive considerable acceptance by the industry, namely “Simple English Language
Contract” and “Adjudication” can be utilized in the future condition in Malaysia.
Structured interview conducted showed indifferent stand in respond towards
the concept of NEC which is said to be the panacea of all ills in the construction
industry in United Kingdom. Respondents voiced their proposals of partnering being
a better alternative to minimize disputes in the construction industry. Also, some
respondents opined that a shorter and easier Standard Form of Contract that can be
seen to be a forward move in the industry is a Design and Build Form with option
modules or add-on for financing which could serve as betterment to the industry.
CHAPTER 6
CONCLUSION AND
RECOMMENDATIONS
CHAPTER 6
CONCLUSION AND RECOMMENDATIONS
6.1
Introduction
During the last two decades alone, the construction industry has witnessed a
revolution in its management, organization and method of work that is unparalleled
in its history. What is more, amidst this tumult serious questions have also been
raised about the nature and role that contracts should continue to play. Divergent
views have been expressed on the topic and yet, despite changes wrought within the
industry, contracts too have changed.
Diverse new forms of procurement have evolved which now show change in
a new light. What is remarkable about the changes is that they have all shaped
industry and also that they have all shaped NEC. A key question raised here has been
whether Malaysia accepts the NEC’s concept and has it reached the point of
readiness to embrace new paradigms by implementing NEC in its construction
industry. This chapter consolidating the research results and findings infers
conclusions from this study.
107
6.2
Research’s Overview
The research is undertaken to achieve a specific objective set out in
Chapter 1, which is to examine the possibility of implementing the New Engineering
Contract (NEC) 1993 issued under the sanction of Institution of Civil Engineers
(ICE), United Kingdom in the Malaysian construction industry. This section covers
an overview of the objective.
This research commences with examining the criticisms in a number of
respects of the traditional standard forms of contract. In examining the critiques, the
merits and demerits of standard form of contract as well as the needs to change are
also explained in Chapter 2.
The research further proceeds to examine the development of the NEC in the
engineering and construction industry. In examining the development, the NEC’s
implementation and its successes in the construction industry to date is reviewed in
Chapter 3.
Determining principles of NEC is done to identify its salient aspects which
differ the NEC from traditional standard form of contract is attained in Chapter 4.
To begin, The NEC Family of Contracts, structure of the NEC and the drafting
objectives of NEC are presented. An identification of the salient aspects of the NEC
is outlined in Chapter 4.
To examine the possibility of implementing the NEC in the Malaysian
construction industry, a structured interview was conducted with a panel of
distinguished professionals to assess their perception of how far the NEC’s concept
is acceptable at this point of time. Chapters 3 and 4 on the NEC establish the
groundwork. The assessment of the industry’s perception manifests in Chapter 5.
108
6.3
Methodology Accomplished
To achieve the objective of this research, certain methodologies were
established. A comprehensive study of the inspiration and creative process abetting
the development of the NEC was performed. The most crucial method aimed at
accomplishing the objective was a structured interview conducted with highly
respected professionals in the industry. Lastly, the findings were assembled to
resolve the objective of this research.
6.4
Research’s Findings
The main conclusion ascertained in this research is as follows:-
a)
NEC and its tenets is not accepted by the Malaysian construction industry to
replace the de-facto forms used in the market at this point of time based on
the indifference stance taken by prominent professionals towards the NEC’s
concept. In most responses towards the NEC’s salient features, respondents
voiced their acceptance with some reservation.
b)
Some of the NEC’s salient features received considerable acceptance by the
Malaysian construction industry, namely “Simple English Language
Contract” and “Adjudication as a Form of Alternative Dispute Resolution”.
c)
The industry view that the position of contract administrator is still best to be
held by the Architect at this point of time even though recognizing there is a
possibility of the Architect not able to perform his quasi-judicial role
impartially.
109
d)
On proposition to have the Client taking the centre stage of the construction
process rather than to remain contractually passive, it is accepted by the
industry. However this is favoured by the industry when the Client is a
regular developer who is familiar with the construction process. Thus, the
industry thinks in variably, those Clients can be very much involved.
e)
The industry view Variation Order is best to subject to re-measurement upon
completion of works even though Variation Order to be agreed prior to work
at site can give minimal incidence of dispute and prompt certification as well
as payment.
f)
On proposition to have a flexible and responsive Standard Form of
Construction Contract that can be used at all the interfaces of a project, able
to applied in all contracting methods and meant for every type of engineering
and construction work, it is generally not favoured by the industry.
g)
Limitation on the usage of CIDB Standard Form of Contract 2000 is due to
Employer’s preference of a “tried and tested” Form of Contract namely PAM
Form and PWD 203A. In making a comparison with the industry’s Standard
Form of Contract, the CIDB Form is found to have similarities with the
NEC.
Based upon the research’s finding, it indicated that the industry is not wholly
in favour of the NEC’s concept and is not ready to embrace the NEC to be in total
use for the Malaysian construction industry at this point of time. Nevertheless, some
of the attributes of the contract which receive considerable acceptance by the
industry, namely “Simple English Language Contract” and “Adjudication” can be
utilized in the future condition in Malaysia.
110
6.5
Research’s Constraints
The central of the research is NEC and the possibility of implementing the
NEC in the Malaysian construction industry. NEC is virtually non existence in
Malaysia. Hence, the lack of knowledge on NEC amongst respondents may impair
the accuracy of the findings. In addition, only salient aspects of the NEC was
included in the assessment where respondents felt to be the main areas to be
concerned which could appropriately be addressed as radical changes for Standard
Forms of Contract in the Malaysian construction industry. It is beyond the capacity
of this research to look into every aspects of the NEC given only two months to
execute this study and to prepare this report.
6.6
Recommendations
What has been observed in the industry lately is the further tightening of
conditions in Standard Forms of Contract as seen by the recent seminar on the
proposed amendments to PAM 1998.
Perhaps alternative such as having a
Construction Act may be a more practical solution to eradicate problems in the
construction industry.
In the United Kingdom, the leading report by Sir Michael Latham which
attempt to change the culture and philosophy pervading the construction industry
there is influential in the subsequent enactment of the Housing Grants, Construction
and Regeneration Act (HGCRA) 1996. The essence of the Act is the provision for
interim settlement of disputes by Adjudication, payment by installment for contracts
lasting longer than 45days, the ability to suspend work if not paid within a specific
period and the outlawing of “pay when paid” clause.
111
Meanwhile in Australia, the Building and Construction Industry Security of
Payment Act 1999 set up a unique adjudication form in resolving disputes over the
amount due for payment to subcontractor. While other countries have taken bold step
forward to have an Act that regulates the construction industry, perhaps Malaysia has
reach the point of having a separate Act solely for the construction industry instead
of dependable on the Contracts Act 1950.
Furthermore, the Malaysian construction industry is mirrored against the
industry in United Kingdom. Practice of having Nominated Subcontractor is initiated
from the United Kingdom is still currently widely practiced here. In effort of trying
to improve Standard Forms of Contract in Malaysia, possibility can also be look
upon to discard some outdated practices that are no longer applicable and that could
possibly lead to disputes.
6.7
Future Research
The subject on Standard Forms of Contract is continuously under study.
Based on this dissertation, the following could be possible areas for future research
that may also be beneficial to the industry:-
a)
Standard Form of Design and Build Contract with option modules or add-on
for financing.
b)
Partnering as an effort to minimize disputes in the Malaysian construction
industry.
112
6.8
Conclusion
The use of standard construction contracts is not without its advantages.
However, the limitations and the philosophy inherent in the standard construction
contract adopted must well be appreciated. One possible disadvantage of the
prevalent use of standard construction contracts is that this inhibits thinking and new
developments and ideas which are not reflected in the standard construction contract
adopted. This relates to the NEC being an ingenious product of Dr. Martin Barnes
with clearly articulated drafting objectives which include flexibility; clarity and
simplicity; stimulus to good management; role integration; risk allocation; role of
co-operation at law; and prevention.
Further to the above, certain innovations in NEC and beyond some standard
construction contracts include “Simple English language Contract”; “Adjudication”,
“Employer to be the Core of the Construction Process”; “Separation of the Role of
Designer cum Contract Administrator”; “Supporting Materials to accompany the
contract such as Guidance Notes and Flowcharts”; “Pre-agreed Variation Order”;
“Early Warning Procedures”; “Accepted Programme”; and “Work Acceleration”.
It must be emphasized that it is beyond the capacity to look into all the
aspects of the NEC. The industry’s perception was gained through their acceptability
towards the NEC’s main tenets. The research’s finding indicated that the industry is
not wholly in favour of the NEC’s concept. Ultimately, a general view was held that
the Malaysian construction industry is not ready to fully embrace the NEC at this
point of time. Nevertheless, some of the attributes of the NEC such as “Simple
English Language Contract” and “Adjudication” can be utilized in the future
condition in Malaysia. In conclusion, there is no ideal contract in existence at this
moment in the Malaysian construction industry and there is no single Form of
Contract could deal with every situation in the construction process. Nevertheless,
the features and innovations of NEC are highlighted which draftsman of construction
contracts may wish to have them for consideration in the near future.
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APPENDICES
A
Letter Seeking Permission to Conduct Structured Interview
B
Structured Questions
C
Matrix of the NEC “family” of Documents
D
Engineering and Construction Contract Main and Secondary Options
E
Professional Services Contract Main and Secondary Options
F
Plant Contract Main and Secondary Options
120
APPENDIX A
Letter Seeking Permission to Conduct Structured Interview
June 1, 2006
Dear Sir
I am a Masters Degree student conducting a dissertation regarding Standard Forms of
Construction Contract. I am concerned that my work be relevant and interesting. I have been
interested in Standard Forms of Contract and I believe that my dissertation on the subject is
important in promoting radical changes to standard forms of contract to address problems in
the Malaysian construction industry.
The fact that a plethora of forms was seen worldwide and the recent issuance of new
standard forms of contract in Malaysia to address long standing issues on claims, disputes,
arbitration and litigation provokes a mind boggling question to the possible long term
solution in Malaysia.
This study undertakes to examine the approaches by the vanguard of the construction
industry to remedy the affliction of increasing problems in the Malaysian construction
industry. The introduction of the New Engineering Contract (NEC) is said to be a specific
response to the widespread criticism of standard forms for failing to meet the needs of the
construction industry. NEC as seen in this research is radically different in term of its style
and structure from the traditional forms of contract used in the construction industry.
This study requires me to interview prominent professionals as an assessment of their
perception of how far NEC’s concept is acceptable, which could drive the possibility of
implementing NEC in the Malaysian construction industry. The meeting should take
between 20 to 45 minutes. Participant results will be held in the strictest confidence.
Thank you for taking the time to consider participating in this effort. I will be calling you in
the next week to arrange an interview at your convenience. However, if you may need
further information or clarification, please feel free to contact me. I deeply appreciate
the opportunity of being granted an interview.
Thank you.
Melissa Chan Yuet Li
M. Sc. Construction Contracts Management Student
Quantity Surveying Department
Faculty of Built Environment
Universiti Teknologi Malaysia
121
APPENDIX B
Structured Questions
1)
Respondent’s Name :
………………………………
Date / Time
………………………………
:
Language of a Contract being “Simple Plain English”
A distinctive aspect of the collaboration of the NEC is the language. NEC is
said to be the first standard form of contract that attempted use simple plain
English. It is written straightforward, without too long sentences and few
wordings.
Question:
•
Should a Standard Form of Contract be drafted in a simple language, away
form legalistic language found in the usual Standard Form of Contract?
•
What is your view about overly legalistic language needed in Standard
Form of Contract that many believe it is essential to preserve the legality
of the document?
2)
Acceptance towards the idea of Adjudication as a form of ADR
Adjudication fairly new concept for a quick form of dispute resolution and is
seen as a “quick fix” to issues arising during the on-going of the construction.
The industry is waiting in anticipation about the concept of Adjudication to
be implemented in the Malaysian construction industry. The NEC made firm
stand on adjudication.
Question:
•
What is your view on the degree of success of arbitration at this point of
time in the Malaysian construction industry?
•
What is your perception towards the concept and effectiveness of
Adjudication?
122
3)
Separation of Architect’s Role of Designer cum Contract Administrator
Traditionally under the PAM Form of Contract, an Architect being the
designer of project is the Contract Administrator. There have been numerous
debates about the dual role played by the Architect as both an agent of the
Employer and an independent certifier may not best be executed by same
person.
The NEC takes an approach where the role on contract administration lies
with the Project Manager while the Architect/Engineer’s sole function is on
the production drawings/design.
Question:
•
Should there be a separation of the Architect’s Role of Designer cum
Contract Administrator?
•
What is your opinion in the sense of relieving the Architect’s quassijudicial role played in traditional forms?
4)
Employer to be the Core of the Construction Process
Traditionally, under the PAM Form of Contract, Client is to remain
contractually passive where his primary role is on payment and order
variation if necessary. However, the situation now shows that the Client is
armed with large pool professionals where he might desire a higher degree of
control throughout the construction process.
Question:
•
What is your view about Client’s level of involvement in the construction
process in the Malaysian construction industry at the moment?
•
Do you believe that Client’s active involvement throughout the
construction process would help to eradicate some core contractual
problems?
•
What are the advantages/disadvantages of Client’s active involvement?
123
5)
Variation order to be agreed prior to work at site
Traditionally, Variation Order is to be subjected to re-measurement when
work is completed later. The NEC moves away from re-measurement
delivery system where Variation Order is to be agreed prior to work at site.
Question:
•
How do you feel about tightening the valuation of variation whereby
Variation Order is to be agreed prior to work at site rather than to be
subjected to re-measurement upon completion of works?
•
What would be the advantages/disadvantages as to the concept of
pre-agreed variation?
6)
Flexibility of a Standard Form of Contract taking into account and
responding to ever-changing needs
Flexibility is one of the main articulated drafting objectives NEC where it is
intended to be a responsive form that takes into account and responds to everchanging needs.
Question:
•
What is your general view about the flexibility of a standard form of
contract in the Malaysian construction industry?
•
Do you feel that a Standard Form of Construction Contract should be so
flexible that it can be used at all the interfaces of a project, able to applied
in all contracting methods and also meant to be used for every type of
engineering and construction work with minor adjustment?
7)
Acceptance towards the CIDB Standard Form of Contract 2000
In making comparison with the Standard Forms of Contract in the Malaysian
construction industry, the NEC is found to have similarities with the CIDB
124
Standard Form of Contract 2000 in term of providing excellent management
manual such as guidance notes that accompanied the contract.
Question:
•
What is your perception of the degree of usage, acceptability and
implementation of the CIDB Standard Form of Contract 2000 to date?
•
What is your view as to the merits and demerits of the CIDB Standard
Form of Contract 2000?
8)
Other Comments
Question:
•
What is your general view on the possible solution to address some of the
pertinent issues in the Malaysian construction industry?
•
Do you believe that an issuance of a new Form of Contract would be a
“real time” solution to the problems that is currently faced in the industry?
125
APPENDIX C
Matrix of the New Engineering Contract “family” of Documents
Table of Main Options
Activity
Bills of
Cost
Contract
Schedule Quantity Target
Reimbursable Management
Engineering and
Construction
YES
YES
YES
YES
YES
Contract
Professional
Services
YES
NO
YES
NO
NO
Contract
Plant Contract
YES
NO
YES
YES
NO
Short
Price list covers payment by activity schedule,
Contract
lump sums, bills of quantities, schedule of rates per hour or per day
Term
Time
Based
NO
NO
YES
YES
YES
NO
Table of Secondary Options
Engineering and
Construction Contract
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Yes
No
No
No
No
No
No
No
No
Professional
Services Contract
No
Yes
No
Yes
No
No
Yes
No
No
No
No
Yes
No
No
No
No
No
Yes
Yes
Yes
Yes
Secondary Options
Performance bond
Parent guarantee
Advanced Payment
Multiple currencies
Sectional Completion
Limitation of liability for design
Price adjustment for inflation
Retention
Bonus for early completion
Delay damages
Low performance damages
Changes in the law
CDM Regulations 1994
Trust Fund
Additional conditions of contract
Extending the defects date
Spare parts
Transfer of copyright
Employer's Agent
Termination at will
Special conditions of Contract
Country Limitation of compensation
compensation event assessment
No
No
Source: Thomas Telford Electronic Publishing Services, 1997.
Plant
Contract
Yes
Yes
Yes
Yes
Yes
No
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Yes
No
No
No
No
Yes
126
APPENDIX D
Engineering and Construction Contract Main and Secondary Options
Main Options
The Main Options differ in arrangements for payment to the Contractor and in the allocation of
risk between the Employer and the Contractor
Main options available:
A – Priced contract with activity schedule
B – Priced contract with bill of quantities
C – Target contract with activity schedule
D – Target contract with bill of quantities
E – Cost reimbursable contract
F – Management Contract
Type of
Contract
Priced Contract
Main Option
Payment
Risk
A and B
Target Contract
C and D
Cost
Reimbursable
Contract
Management
Contract
E
Paid for work at tendered
(bid) Prices
Cost shared between
Employer and Contractor
Paid for properly expended
costs
Largely borne by
Contractor
Shared between
Employer and Contractor
Largely borne by
Employer
Paid for Actual Cost and Fee
Largely borne by
Employer
F
The major reasons for choosing the main options are as follows:
•
If the Employer can define the scope of work and it is more easily expressed as activities,
then Option A.
•
If the Employer can define the scope of work and it is more easily expressed as bill of
quantities, then Option B.
•
If the scope of work is not fully defined or where anticipated risks are greater, then Option
C or Option D.
•
If the definition of the work is inadequate, yet an early start is required, then Option E.
•
If the Employer do not wish to subcontract directly with the Subcontractors, then Option F.
127
APPENDIX D
(Continued)
Secondary Options
When to use the various Secondary options:
It should always be borne in mind that some Secondary Options may not be used with some
Main Options. The contract strategy should be carefully considered so that incompatible
choices are not made.
Secondary options available:
G – Performance bond
H – Parent company guarantee
J – Advance payment to Contractor
K – Multiple currencies
L – Sectional completion
M – Limitation of Contractor’s liability for his design to reasonable skill and care
N – Price adjustment for inflation (used only with Options A, B, C A and D)
P – Retention (used only with Options A, B, C, D and E)
Q – Bonus for early completion
R – Delay damages
G
H
J
K
L
M
Use when require financial security for the performance of the
Contractor in accordance with the contract.
Used when you require a guarantee that the work will be finished in
accordance with the contract. This guarantee is normally appropriate
where the Contractor has a parent company.
Use when the Contractor has to make a substantial investment at the
beginning of the contract.
Use when payment to the Contractor should be made in ore than one
currency and the risk of exchange rate changes should be carried by
the Employer.
Use when you require sections of the works to be completed before
the whole of the works. If you include this option, you must define
each section in the Works Information.
Option is frequently applied to design work. It reduces the Contractor’s
liability for his design to be in accordance with the Works Information.
In the event of a defect, the Contractor has adequate defence if he
can show that he used reasonable skill and care.
128
APPENDIX D
(Continued)
More Secondary Options
N
P
Q
R
S
T
U
V
Z
Use when the Employer decided to accept the risk of inflation
Use when additional financial security is required should the
Contractor not complete any part of the works, and other Contractors
need to be called upon to complete the works. It also provides
additional motive to the Contractor to complete the works.
Use when completion before the Completion Date in the Contract Data
will benefit you and you can use this option to motivate the Contractor.
Use when delay in completion of the contract will have adverse
financial implications. It is recommended that this option is included in
most contracts.
Use when performance in terms of the Works Information is important
and performance is difficult to quantify. This option eases administration, and it relieves the Employer of the burden to prove that the
Contractor’s work is substandard.
Use when the Employer decides to accept the risk of changes in the
law occurring after the Contract Date.
Use where a delay to the work caused by application of the
Construction (Design and Management) Regulations 1994 could not
reasonably have been foreseen by an experienced Contractor.
Use to choose the ECC Trust Fund. This clause was designed to protect a firm, at any tier of the supply chain, against insolvency of its
Employer. It is recognized that trust laws differ from country to country.
Use for any special conditions of contract, which you may require.
Source: Thomas Telford Electronic Publishing Services, 1997.
129
APPENDIX E
Professional Services Contract Main and Secondary Options
When to use the various main options:
When using Option A, the Consultant is paid a lump sum for the services according to the
activities in the Activity Schedule.
Option B is a cost reimbursable form of contract, which should be used when the services
cannot be defined sufficiently accurately for a lump sum to be provided.
Option C is a target contract, which is sometimes used when the extent of the work to be
done is not fully defined or where anticipated risks are greater. The financial risk is shared
between the Employer and the Consultant.
When using Option D, the Term Contract provides for the appointment of a Consultant for an
agreed period time. The Consultant prices a task schedule prepared in advance by the
Employer, where each price on the task schedule is a lump sum for that particular activity.
When to use the secondary options:
G
H
J
Use if the Employer wishes to retain the copyright of the documents
provided by the Consultant.
Use if the Employer’s Agent is nominated to act on behalf of the
Employer.
Use if the Employer reserves the right to terminate for any reason.
Source: Thomas Telford Electronic Publishing Services, 1997.
130
APPENDIX F
Plant Contract Main and Secondary Options
Main options available:
A – Priced contract with activity schedule
B – Target contract with activity schedule
C – Cost reimbursable contract
D – Term contract with price list
Secondary options available:
G – Performance bond
H – Parent company guarantee
J – Advance payment to Contractor
K – Multiple currencies
L – Sectional completion
M – Country limitation of compensation event assessment
N – Price adjustment for inflation
P – Retention
Q – Bonus for early completion
R – Delay damages
S – Low performance damages
T – Changes in the law
U – The Construction (Design and Management) Regulations 1994
V – Trust fund
W – Extending defects date
X – Spare parts
Z – Additional conditions of contract
Note on main options:
Option D – Term contract with price list is a “call off” or framework contract.
Using the secondary options:
M
W
X
Use if the risk of choosing a source country for plant should rest with
the Supplier choose a source in an earthquake zone, there would be
no change to the Prices or the Completion Date if an earthquake
occurred.
Use if the whole of plant cannot be used due to a Defect after
Completion but before the defects date, the defects date is increased
pro rate.
Use to solve the problem of spares provision over the operating life of
the plant
Source: Thomas Telford Electronic Publishing Services, 1997.