| Date | 12 April 2006 |
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| Judgment | New Engineering Contract, third edition |
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| The Issue | Meaning of “prevention”. |
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| Implication |
Sometimes familiar words have unexpected meanings – be sure you know what your contract says. |
printOne of the principle features of the NEC form of contract has always been the extent to which the employer is allowed (via his Project Manager) to dictate or influence the manner in which the contractor undertakes the works. This brings benefits in terms of control and also in allowing the impact of the difficulties that tend to arise on construction projects to be predicted and minimised. One example of this is the way in which the early warning procedure allows the employer to influence or control the solution to the problem that has been identified – and this has the potential to bring benefit to both parties. The consequence of the employer’s interventions is likely to be a compensation event, and the NEC contains a detailed procedure whereby the contractor is enabled to be reimbursed for the effects of the compensation event upon his costs, and also for any necessary adjustments to the completion date to be made. Whilst the compensation event procedure also extends to matters such as weather, there has not been, to date, any provision for an act of force majeure to be treated as a compensation event. The third edition of the NEC (NEC3, published in July 2005) changes this by introducing the new concept of prevention. The term prevention is potentially misleading as, to lawyers, the term is normally applied to a situation where one party is prevented by the other from fulfilling its obligations under a contract. As used by NEC3 the term has a different meaning and embraces a range of force majeure type events which are defined by the contract as being events that neither party could prevent and which an experienced contractor would have judged at the contract date to have such a small chance of occurring that it would be unreasonable to have allowed for them. In addition to being both unpreventable and something that an experienced contractor would not have allowed for, the events must be such as to either stop the contractor from completing the works or stop the contractor from completing the works by the date shown in the accepted programme. Whilst a force majeure type provision is welcome and sensible, NEC3 effectively places the risk of these prevention events with the employer as, whenever one occurs, the PM is required to instruct the contractor how he is to deal with the event and the occurrence of the event now gives rise to a compensation event. This raises two important points that employers need to bear in mind when deciding upon a procurement strategy. Firstly, because of the way in which the NEC treats compensation events, the contractor is entitled to both his costs and an extension of time. Similar circumstances under most other forms of contract would only entitle the contractor to an extension of time with the financial consequences of the event lying where they fell (i.e. the contractor would not be entitled to any additional costs, and the employer would lose the right to damages for any delay caused). Secondly, because of the way in which NEC3 defines the concept of prevention, the scope of the new compensation event is potentially much wider than might be expected with a conventional force majeure provision. Force majeure is always difficult to define with precision, and this lack of precision may be one of the reasons why the NEC avoids using the term. Another reason may be a preference to avoid legal or foreign terms in favour of plain English. Thinking about the definition adopted, it is not too difficult to identify events that fairly regularly occur on construction projects which do not amount to a force majeure but which could not have been prevented by either party, which would prevent the achievement of the accepted programme and which would not have been allowed for by an experienced contractor. One example is where subcontractors and suppliers, selected with care by the contractor, cease to trade. Another example is where, despite the best efforts of the contractor in carefully selecting suppliers and undertaking quality control, defective materials become incorporated into the works that have to be removed at great expense and causing delay. In each of these examples, NEC3 would say there has potentially been a prevention event, for which instructions should be issued by the PM and in respect of which the consequences (in respect of time and money) are at the risk of the employer. This way of looking at what is beyond the control of the parties is not simply theoretical but follows a 1989 decision by the House of Lords in Scott Lithgow v Secretary of State for Defence (a shipbuilding case). Here the contract allowed Scott Lithgow (the contractor) to be paid for “exceptional dislocation and delay arising during the construction of the vessel due to alterations, suspensions of work or any other cause beyond the contractor’s control”. Delays were caused as a consequence of defective cables having been supplied by one of Scott Lithgow’s suppliers, and these were found not to have been a matter within the control of the contractor – and to give rise to additional entitlements as a consequence. Thus, whilst the NEC’s new provisions might appear well intentioned, employers in particular should carefully consider whether they are willing to assume all of the risks associated with a prevention event, in the manner now required by NEC3.
CJ-0614
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© Brewer Consulting |
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