Worldwide: Updates To International Standard Forms:

NEC4 And FIDIC 2017

Last Updated: 9 February 2018
Article by Muhammad Anamul Hoque
Clyde & Co

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In 2016, JCT introduced its latest suite of contracts to the industry. In 2017, NEC and FIDIC
followed suit, with NEC publishing its NEC4 suite of contracts and FIDIC publishing its 2017
editions of the Yellow, Red and Silver Books. In this feature, we take a look at the key changes
that users of these international forms need to be aware of.

NEC4 - KEY CHANGES

On the 22 June 2017, the UK Institute of Civil Engineers released its NEC4 suite of contracts –
the most substantial update since NEC3 was published in 2013. The new suite of contracts was
released to "build on the success of NEC3", with the objective of "evolution not revolution". The
NEC4 suite involved an update to all of the existing NEC3 contracts, as well as the release of
the following additional contracts:

 a Design, Build and Operate Contract;

 an Alliance Contract (in consultation form only); and
 new forms of subcontract.

The rationale behind the changes introduced by NEC4 included NEC's desire to minimise
differences between the forms, to reduce users' over-reliance on z-clauses, to increase clarity
within the forms, to bring the forms more in line with public sector principles and to take on
board industry feedback. Many of the changes in the NEC4 suite are minor, but some are
significant, presenting new risks and opportunities for users. Below, we outline some of the key
chances to the Engineering and Construction Contract (ECC) that users need to be alive to.

Scope:

 The term Works Information is no longer used, now replaced with the term Scope
throughout the suite.
 A new core clause allows the Contractor to propose Scope changes to the Project
Manager for acceptance, with a value engineering percentage used (under Options A &
B) to split the benefit between the parties.
 A new secondary option also makes provision for the Contractor to propose Scope
changes to reduce the whole of life cost of the asset, though the form is silent on liability
issues if the proposed results are not achieved.
Time:

 The term Risk Register is no longer used, now replaced with the term Early Warning
Register, to distinguish it from the project risk register used for wider project
management purposes.
 Amendments have been made to the early warning regime requiring the Project
Manager to prepare the first Early Warning Register within 1 week of commencement
and set a date for the first Early Warning meeting within 2 weeks. The forms were
previously silent on how this process was kick-started.
 Employers should be aware that there are new deeming provisions in relation to any
Contractor's programme submitted for acceptance. The programme will be deemed to
be accepted by the Project Manager if he / she does not notify acceptance or non-
acceptance within two weeks of it being submitted and such failure continues for a
further week upon the Contractor giving notice. The rationale is to resolve the stalemate
that otherwise arose under NEC3 and therefore reduce the scope for uncertainty as to
the status of the Contractor's programme.

Payment:

 Significant changes have been made to the payment provisions. Contractors should be
aware that there is a new obligation to submit a payment application to the Project
Manager before each assessment date. If the Contractor fails to do so, the amount due
is deemed to be the lesser of the Project Manager's assessment or his previous
assessment. Accordingly, in the absence of an application, Contractors can only receive
a nil or negative assessment for that payment cycle.
 A new deadline has been introduced for the Project Manager to make a final
assessment of the amount due: four weeks after the Defects Certificate or 13 weeks
after the termination certificate. The Project Manager's final assessment is conclusive
unless the specified time limits for dispute resolution procedures are complied with,
meaning any challenge by the Contractor outside these time limits will be time barred.
However, if the Project Manager fails to issue the final assessment of the amount due by
the deadline in the Contract, then the Contractor may issue its final assessment of the
amount due. This will then become conclusive unless the specified time limits for the
dispute resolution procedures are complied with. Under Options C, D and E, the
Contractor can request that parts of the Defined Cost are assessed as the Works
progress. This is done by the Contractor notifying the Project Manager when part of the
Defined Cost is finalised. The Project Manager then has 13 weeks to review the part and
if no assessment is issued by the Project Manager, the Contractor's assessment is
deemed accepted.

Compensation:

 There is a new compensation event if the Project Manager rejects a quotation for a
proposed instruction, enabling the Contractor to seek payment for the costs of preparing
the quotation. Additional compensation events may also be stated in the Contract Data.
The rationale is to reduce the parties' need to incorporate them by way of z-clauses.
 The concept of a 'dividing date' has been introduced to resolve the debate about the
point at which the Contractor's compensation changes from actual Defined Cost to
forecast Defined Cost (plus the Fee in both cases). Where the compensation event
relates to a communication, the Dividing Date is the date of the relevant communication,
 in relation to all other compensation events, the Dividing Date is the date of notification
of the relevant event.

Secondary Options:

 Option X10 introduces a BIM clause. The option is designed to be 'protocol

independent', allowing the Employer to specify its requirements in the Scope. However,
in terms of ownership of the model and liability issues, these are dealt with in the option
itself. Importantly, NEC4 takes a different approach in this regard than other industry
protocols. The Employer takes ownership of the model as well as the Contractor's rights
over the Project Information it provided for the model. The Contractor is only liable for a
fault or error in its Project Information where it failed to provide the Project Information
using the skill and care normally used by professionals providing information similar to
the Project Information (i.e. if it is negligent).
 Option X15 has been amended to provide for additional requirements in relation to
design and build contracting. Importantly, the Contractor's design liability has been
aligned with the standard expected from professionals (i.e. it must carry out its design
using the skill and care normally used by professionals designing works similar to the
Works). Previously, the Contractor's liability was just linked to a requirement to exercise
reasonable skill and care. The onus is now also on the Employer to prove that the
Contractor did not exercise this standard, as opposed to the Contractor proving that it
did, which was the position under NEC3. The option now also includes additional
provisions relating to licensing, retention of design documents and the requirement to
take out professional indemnity insurance.

General changes to dispute resolution options (Now termed "Resolving and Avoiding
Disputes")

As a general note it is important to remember that Options W1 and Option W3 are for contracts
where the Housing Grants, Construction and Regeneration Act 1996 does not apply. Option W2
must be used for contracts where the 1996 Act does apply. There have been important changes
to all of these dispute resolution options:

Option W1:

 A new mandatory 'Step 1' has been introduced, requiring parties to refer a dispute to
Senior Representatives prior to commencing adjudication.
 This process has very short deadlines for compliance, failure to comply with which will
result in the referring party being time barred. The deadlines differ depending on the
particular dispute in question.
 Once the dispute is referred to the Senior Representatives, the parties have one week to
submit written statements of case and the Senior Representatives then have three
weeks to negotiate and produce a written list of issues agreed and not agreed. The
issues not agreed must be referred to adjudication within two weeks and if this deadline
is missed the parties are time barred from disputing the issues further.
Option W2:

 The Senior Representatives procedure from Option W1 has also been introduced to
Option W2. However, it is purely consensual and does not fetter the parties' right to
adjudicate at any time.

Option W3:

 If this option is used, a standing Dispute Avoidance Board is put in place to resolve
potential disputes. Reference to the Dispute Avoidance Board is a pre-condition to
reference to the tribunal.

It is clear that a number of significant amendments have been made to the NEC4 suite. While
NEC are keen to promote the new suite as one of "evolution not revolution", the amendments
have resulted in a much longer form and appear to adopt regimes users may be used to seeing
in other standard forms, such as JCT. In this way, the question arises as to whether NEC is
moving away from the original ethos of the form and therefore whether its NEC4 suite does
actually represent revolution over evolution?

FIDIC 2017 – KEY CHANGES

Almost 20 years after FIDIC released the 1999 editions of the Yellow Book (Plant and Design-
Build), Red Book (Building and Engineering Works designed by the Employer) and Silver Book
(EPC Turnkey), the industry has finally got its hands on the much anticipated second editions,
which were released at the FIDIC International Contracts Users' Conference on 5 December
2017.

There was much hype about what might be expected, particularly following the widely criticised
changes that were introduced by the consultation version of the Yellow Book (released at last
year's Users' Conference). Those following developments closely will recall some not so friendly
feedback from a number of international contractor bodies. Issue was taken with the higher
degree of risk transfer from Employer to Contractor and more burdensome obligations in
relation to contract administration.

FIDIC appears to have taken some of this feedback on board, softening the risk allocation that
was previously viewed by some as not reflecting good industry practice. However, the new
Books are still much more administratively burdensome than their 1999 counterparts, with
various deeming provisions and time bars that may catch parties out if they are not careful.
FIDIC has stated that the new Books are aimed at increasing clarity and certainty within the
forms. However, the introduction of such numerous highly prescriptive procedures may not be
what some users want to see.

Below, we summarise some of the key changes to the Yellow Book that users need to be alive
to.

Risk Allocation

In terms of risk allocation, perhaps one of the most contentious amendments proposed by the
consultation version was that relating to the Contractor's design risk. Under the consultation
version of the Yellow Book, the Contractor was required to indemnify the Employer against all
errors in its design which resulted in the Works not being fit for purpose or resulted in any loss /
damage for the Employer. Furthermore, this indemnity sat outside the indirect and
consequential loss exclusion and the aggregate cap on liability. In the 2017 Yellow Book, this
indemnity has been retained but has been limited to errors in design resulting in the Works not
being fit for purpose. In addition, Contractors will be happy to hear it is no longer carved out
from the exclusion for indirect and consequential loss or the aggregate cap on liability. So while
the indemnity itself may still be a point of contention, it is limited to an extent.

In addition, users will be pleased to know that the confusing amendments that had been
proposed in relation to Employer's Risks and Contractor's Risks have been replaced with much
simpler provisions. Effectively, the categories of what used to be referred to as 'Employer's
Risks' have been expanded and now also include any act or default of the Employer's
Personnel or other contractors. In addition, the Employer's indemnities in favour of the
Contractor have been expanded to capture damage to property as a result of these liabilities.
Importantly, both parties' liability under the indemnity provisions will be reduced proportionately
to the extent that an event for which the other party is responsible has contributed to the loss.

Contract Administration

In terms of contract administration, one of FIDIC's main aims was for the second editions to
stimulate better project management. This is reflected through:

 more stringent requirements relating to notices;

 changes to the programming provisions, including:
o additional programming requirements; And
o new deeming provisions for the acceptance of revised programmes;
 the introduction of advance warning provisions:
o similar to the NEC approach requiring each party to notify the other of any known
or probable future events that may adversely affect the performance of the
Works, increase the Contract Price or delay the execution of the Works;
 changes in the role of the Engineer, including:
o a requirement that the Engineer has suitable qualifications, experience and
competence to act as the Engineer under the Contract and must act like a skilled
professional;
o new deeming provisions in relation to the issue of an Engineer's determination,
which must be issued within 42 days of the parties failing to agree a matter,
otherwise (i) in the case of a Claim, the Engineer is deemed to have rejected it;
or (ii) in the case of any other matter, the matter is deemed to be a Dispute which
either Party can refer to the Dispute Avoidance / Adjudication Board (DAAB)
without the need for a Notice of Dissatisfaction (NOD);
o a requirement that in making his / her determination the Engineer must act
'neutrally';
o if a Party objects to a determination of the Engineer, a requirement that they
issue a NOD within 28 days, otherwise the determination is final and binding; and
o if either Party fails to comply with an agreement of the Parties or a final and
binding determination, a right for the other Party to refer the failure directly to
arbitration for enforcement by expedited procedure;
 changes to claims provisions to encourage faster dispute resolution, including:
 omaking the claims procedure and its time bars apply to the Employer as well as
the Contractor;
o extending the 42 day period for provision of the Fully Detailed Claim to 84 days
and creating a time bar where the claiming Party fails to give a statement of the
legal basis of its claim within this time;
o new grace provisions allowing the claiming party to dispute that its NOD is time
barred (whether by failure to comply with the initial 28 day timeframe or
subsequent 84 day timeframe) by reference to the Engineer though the Engineer
may only allow late submission if it is justified in the circumstances;
 amendments to the final assessment provisions, including:
o a requirement that the Contractor include all claims in its final statements
(whether referred to the DAAB or not, and despite any NOD being issued in
relation to them), otherwise the Employer will avoid all liability for them; and
o the introduction of a 56 day time bar for the Contractor to dispute the Final
Payment Certificate, otherwise it will be deemed accepted and the Employer will
have no further liability; and
 amendments to the DAAB process, including:
o the appointment of the DAAB as a standing board;
o the option for parties to request that the DAAB provide informal assistance under
a new 'Avoidance of Disputes' regime; and
o a new 42 day time bar to refer Disputes to the DAAB.

While one can see the logic behind some of the changes, the reality is that it will be contractors,
more than employers, who are adversely affected by the amendments. The administrative
burden of the changes will fall predominantly on contractors, with potentially significant
consequences if notices or deadlines are missed. Moreover, while the changes are intended to
encourage better contract management and avoid prolonged disputes, they will likely also result
in formal dispute resolution being commenced at an earlier stage, in order to avoid time bars.

The content of this article is intended to provide a general guide to the subject matter. Specialist
advice should be sought about your specific circumstances.
NEC4: A Dispute Resolution Perspective
Introduction
The NEC form of contract was first published nearly 24 years ago and prides
itself on “helping the industry do things differently and better.”   It is now used
on a wide range of projects not just domestically but also internationally.  For
example, the Crossrail project uses a range of contracts from the NEC3 Suite
including the Project Services Contract and the Engineering and Construction
Contract Option C. 1
Despite its aim of encouraging best practice, the number of disputes arising
out of NEC contracts does appear to be increasing. 2 We are certainly seeing an
increased number of adjudications arising out of NEC contracts.  The case law
on the NEC forms, although still sparse compared to other standard forms, is
also becoming more abundant than it was.
The next generation of the NEC form of contracts (NEC4) was launched in June
2017 and states that it has taken into account “user
feedback”.3 This Insight reviews the NEC4 from the perspective of those
involved in resolving the disputes arising out of NEC contracts. We examine
whether the changes made are likely to make disputes less likely or, at the
very least, cut down on the types of arguments now commonly seen between
the parties to NEC contracts particularly where “good project
management”  hasn’t happened quite as it should.

The Accepted Programme – is there one?

A common theme in the NEC time related disputes we see is that, for one
reason or another, there is no Accepted Programme against which to apply for
compensation events or measure them, or that the Accepted Programme is not
updated monthly as required in the standard form.  This is a major problem in
the NEC form because the Accepted Programme is a key project management
tool that is designed to enable extension of time claims to be dealt with
prospectively as, and when, they arise rather than retrospectively. If the
Accepted Programme is not up to date in   “real time” with progress on the
project prospective assessment of compensation events soon becomes difficult,
if not impossible, for the Project Manager to implement.
As a result, the lack of an updated Accepted Programme sometimes results in
extension of time claims failing to be dealt with during the currency of the
project as intended (i.e. prospectively). Debates as to why there is no
Accepted Programme and/or who is to blame include:

1. The Project Manager acted unreasonably in not approving it and/or did

not approve it prospectively such that it no longer reflected reality on the
project;
2. The contractor has not provided the requisite information required in
order that the updated programme can be accepted by the Project
Manager;
3. The contractor claims that it never had the information to provide one;
or
4. The changes to the programme were too numerous to keep up with
contemporaneously.

Without an Accepted Programme an NEC contract cannot be administered as

intended.  The bases upon which compensation events can be claimed,
assessed and implemented are integrally and inextricably linked to the
Accepted Programme. 4
In NEC4, new provisions have been added which mean a Project Manager can
be deemed to have accepted the programme submitted if he doesn’t get his
skates on after a warning notice.
Clause 31.2 now provides:
“If the Project Manager does not notify acceptance or non-acceptance within
the time allowed, the Contractor may notify the Project Manager of that
failure. If the failure continues for a further one week after the
Contractor’s notification, it is treated as acceptance by the Project
Manager of the programme.” [Emphasis added]
This is undoubtedly helpful and should hopefully reduce some of the games
that we now see in NEC disputes on compensation events arguing for an
extension of time. However, it won’t cure all ills in relation to the Accepted
Programme (for example where a Subcontractor considers, or argues, they do
not have sufficient information to produce an Accepted Programme).
Simplification – The Schedule of Cost Components and the Fee
The Schedule of Cost Components (“SCC”)5 or the Shorter Schedule of Cost
Components (“SSCC”)6 are used “to define those components of the
Contractor’s costs which are included in Defined Costs for all main options
except Option F”7.  The origins of the SCC and SSCC are found in research
carried out during the 1970s and 1980s which established disputes could be
reduced if there was a schedule of costs against which a contractor would be
directly reimbursed with everything else included in the fee. 8
A common problem associated with the SCC and SSCC is that a failure to give
them proper consideration at tender stage (which from our experience is a
more regular occurrence than one might think) can result in a contractor being
out of pocket.  This is because costs which are not included in Defined Cost
are not recoverable unless they have been factored into the Fee already. 9  As
a result, the true cost incurred by the contractor may not necessarily be
reflected under the various components of the cost components of the SCC or
the SSCC.10 This is obviously a potential recipe for disputes because it will
encourage claims on other grounds if an accidental, and arguably unfair, loss
has resulted.
The NEC4 has sought to simplify the position for contractors by reducing the
room for errors by contractors the likelihood of errors being made by them.
This has been done in the following ways:

1. Subcontractor Costs have been amalgamated into the

SCC11/SSCC12 instead of being subject to separate percentages as they
were under NEC3;
2. The “Fee” has been simplified 13 – there is now only one rather than the
two there were previously (a direct fee and a subcontractor fee).
Essentially having the two fees previously complicated the process of
calculating what was due (or not) to all parties and in doing so created
room for errors and arguments. Simplification can only therefore reduce
the scope for disputes;
3. “All contracts now include Schedules of Cost Components which are used
to assess Defined Cost” .14 The SSCC is now only available for Options A
and B and no longer an option for Options C to E which should cause
less confusion.

The decision to include subcontractor costs in the SCC and the SSCC should
overcome the issues commonly found by contractors tendering for works under
the NEC3 form. This was namely that subcontractors either did not want to
provide detailed breakdowns in their tenders which the contractor required to
fill in their SCC/SSCC, or did not have the capability or understand why they
needed to do so.
Now subcontractor’s costs are included in the SCC/SSCC and in Defined
Cost.15 Those costs can be used to value compensation events.  This should
not only make life easier for all parties concerned but also, in making the
position simpler, reduce the number of disputes surrounding the valuation of
compensation events which entail additional subcontractor costs being
incurred.  

Compensation Events
Under both the NEC3 and NEC4 forms, compensation events are events which
are not the fault of the contractor / subcontractor. 16 NEC4 has made a few
changes to this section of the contract which should make life easier for those
claiming and assessing compensation events.
Perhaps one of the most useful in terms of increasing certainty, and reducing
disputes, is the concept of the “dividing date”  which has been added to Clause
63.1 dealing with assessing compensation events. This removes any doubt as
to which Accepted Programme  a compensation event should be implemented
against.
The process of identification, notification, assessment and implementation of a
compensation event often takes several weeks, if not months, from the date of
the original event. Properly administered and managed it is likely that at least
three programmes will have been “accepted”  during the diary of a
compensation event.  This can result in the question: once assessed, against
which programme should the compensation event be implemented?
The “dividing date”  resolves this. The dividing date is the date of a
communication of an instruction or notification by the Project
Manager  or  Supervisor that is a compensation event or, for all other
compensation events, the date of notification of that compensation event. Any
delay to the Completion Date is assessed against the Accepted
Programme current at the dividing date. 17
The NEC4 has also added a new compensation event in clause 60.1 (20) which
recognises that there is a cost involved in obtaining a quotation for proposed
instruction which is then not used 18 for whatever reason.  This is undoubtedly
helpful as it is not unknown for project managers to ask for repeat quotations
which can be expensive and time consuming.  This new compensation event
should stop any such “abuse” of process.
The second “new” compensation event is at clause 60.1 (21) and
states: “Additional compensation events in Contract Data part one” .  The
benefit of this is said to be “that clients can now alter the standard risk profile
contained in NEC4 contracts, without the need for the clause
amendments” .19 How this works out in practice remains to be seen but it
should provide a useful tool if used properly.
Finally, it should also be noted that there has been a small amendment to the
time limit imposed by clause 61.3. Clause 61.3 now states:
“If the Contractor does not notify a compensation event within eight weeks
of becoming aware that the event has happened, the Prices, the
Completion Date or a Key Date are not changed unless the event arises from
the Project Manager or the Supervisor giving an instruction or notification,
issuing a Certificate or changing an earlier decision”.  [Emphasis added]
The time bar itself isn’t new but abiding by it will, it goes without saying, avoid
the need to try and argue around it thereby reducing unnecessary arguments
between the parties. 

Mutual trust and co-operation

One of the key overarching principles enshrined in NEC contracts is that
of “mutual trust and co-operation” .20 However, there is remarkably little
practical guidance or legal authority on what that means! Keating on
NEC321 noted that, whilst apparently unclear, it has been placed within the
contract and as such effect should be given to the words.
Earlier this year, Coulson J considered this obligation in Costain Ltd v Tarmac
Holdings Ltd.22 He considered the words suggested positive obligations and
drew parallels (using Keating on NEC3) between “mutual trust and
cooperation” and obligations of “good faith” .  The Court also considered NEC3
Clause 10.1 in Northern Ireland Housing Executive v Healthy Buildings
(Ireland) Ltd.23 In that case Deeny J held that records of actual time and costs
incurred relating to a compensation event should be disclosed to the Employer.
He held that failure to do so would be “entirely antipathetic to a spirit of
mutual trust and co-operation” .
The NEC4 has clearly tried to continue this principle in the new suites of
contract but has split the obligation into two parts:
“10.1 The Parties, the Project Manager and the Supervisor shall act as stated
in this contract.
10.2 The Parties, the Project Manager and the Supervisor shall act in a spirit of
mutual trust and co-operation”.
This may be better written but doesn’t really resolve the issue of what mutual
trust and co-operation means in practice (and the extent to which damages
can result if a party breaches this obligation). It may be that further case law
will be required before this becomes clearer.  In the meantime, those in
disputes will continue to rely on it where contract procedures have not been
followed. 

Dispute resolution under NEC4

Adjudication remains mandatory under the NEC4 suite of contracts where
Option W2 applies (i.e. where the Housing Grants, Construction and
Regeneration Act - the “Housing Grants Act” - applies. 24 Whether this is
helpful varies from case to case. However, in some circumstances it can lead
to an additional and unnecessary layer of cost.  For example, it would be
better to get the Courts to determine a matter of law or of contractual
interpretation once and for all via part 8 proceedings rather than having to go
to adjudication and then via the courts, notwithstanding the fact that either
party could take the matter to adjudication in any event.
For international contracts, where the Housing Grants Act doesn’t apply the
NEC4 has made a new dispute resolution “option” available. Option W3
provides for the use of a Dispute Adjudication Board (“DAB”). The DAB is
tasked with visiting the site regularly and helping to identify potential areas of
dispute as early as possible and provide recommendations as to how to resolve
them (which are non-binding). 25 This new option is similar to the approach
taken in the FIDIC form of contracts in relation to dispute avoidance. However,
it is only really suitable for larger scale projects where the costs can be
justified.

Conclusion
The amendments outlined above are undoubtedly helpful and should
(hopefully) prevent some of the more generic arguments often seen in NEC3
disputes particularly around the Accepted Programme and whether there is
one.  However, the NEC4 ultimately requires the parties to work together and
adhere to the contractual and project management tools built into it if it is to
work.
The problem with this is that when disputes do arise it is all too often because
this hasn’t happened in practice.  Buying into the NEC “ethos” therefore
remains the key to avoiding disputes under NEC contracts.  When disputes do
arise the relative paucity of case law as to the meaning of some obligations
(e.g. that of mutual trust and co-operation) remains an issue because it give
the parties more room to argue as to the scope of their obligations. That said,
guidance in case law is less rare than it was and this can only assist dispute
resolution under NEC contracts going forwards.
Claire King
Fenwick Elliott LLP
With thanks to Laura Bowler for her research and assistance and to Jonathan
More for his practical insights.
Back to the previous page

 1.Target contract with activity schedule. See https://www.neccontract.com/NEC-in-

Action/Case-Studies/Crossrail
 2.See for example “A pain in the NEC” By James Bessey 30 April 2010, in Building Magazine.
 3.See NEC4 Engineering and Construction Contract, Preface, page vii.
 4.See clauses 60.1(2) - “The client does not allow access to and use of each part of the Site
by the later of its access date and the date for access shown on the Accepted Programme”,
60.1 (3) “The Client does not provide something which it is to provide by the date shown in the
Accepted Programme”, and 60.1 (5) “The Client or Others - do not work within the time shown
on the Accepted Programme, - do not work within the conditions stated in the Scope or – carry
out work on the Site that is not stated in the Scope.”
 5.Used within NEC3 Engineering and Construction Contract Options C, D and E for target price
contracts.
 6.Used within NEC3 Engineering and Construction Contract Option A and B for price based
options.
 7.NEC3 Guidance notes, page 6.
 8.John Broome, “NEC3: A User’s Guide”  (ICE publishing, 2012), Chapter 2.3.3.1.
 9.David Thomas QC, “Keating on NEC3”  (1 Edn., 2012) Para. 6-147. The SCC “defines the cost
components for which the Contractor will be directly reimbursed and defines the cost
components which are included in an assessment of changed costs arising from a compensation
event” (NEC3 Guidance notes, page 124). The SSCC “is used to define the cost components
only when assessing a compensation event”. (NEC3 Guidance notes, page 124).
 10.Rowlinson “A Practical Guide to the NEC3 Engineering and Construction Contract” (pg 154).
 11.The SCC defines these costs as “Payments to Subcontractors for the work which is
subcontracted without taking into account any amounts paid to or retained from the
Subcontractor by the Contractor, which would result in the Client paying or retaining the
 amount twice”. (NEC4 Engineering and Construction Contract, Schedule of Cost Components,
4(41)).
 12.The SSCC defines these costs as “Payments to Subcontractors for work which is
subcontracted”. (NEC4 Engineering and Construction Contract, Short Schedule of Cost
Components, 4 (41)).
 13.Now defined under Clause 11.2(10) of NEC as “…the amount calculated by applying the fee
percentage to the amount of Defined Cost”
 14.Nec4 The next generation: An explanation of changes and benefits  (the “White Paper”).
 15.Defined under NEC ECC Clause 52.1 as “All the Contractor’s costs which are not included in
the Defined Cost are treated as included in the fee. Defined Cost includes only amounts
calculated using rates and percentages stated in the Contract Data and other amounts at open
market or competitively tendered prices with deductions for all discounts, rebates and taxes
which can be recovered”.
 16.The NEC3 user guide defines 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 event has on the Prices and the Completion Date or a Key Date”. (NEC3 Guidance notes,
page 68).
 17.See Jonathan More’s blog on the Fenwick Elliott website titled “The new NEC 4 – it’s not
revolting!” See also Clause 63.1 of NEC4 (engineering and construction contract, Option A:
Price contract with activity schedule).
 18.See the NEC4 user guide, Managing an Engineering and Construction Contract , (Volume 4,
2017), page 56.
 19.See the NEC4 White paper (For full reference see footnote 19).
 20.NEC3 Engineering and Construction Contract, Clause 10.1.
 21.David Thomas QC, “Keating on NEC3” (1 Edn., 2012) Para. 2-004.
 22.[2017] EWHC 319 (TCC).
 23.[2017] NIQB 43.
 24.See NEC4 Engineering and Construction Contract, Clause W2.4.
 25.See NEC4 Guidance, “Managing an engineering and construction project” , (Volume 4,
2017) page 84.
 Dispute resolution
under NEC4: Key
takeaways
25 JUL 2017
Anamul Hoque

 Multi-tier dispute resolution: Options W1 and W2

 The new Dispute Avoidance Board: Option W3
 What it means

The new NEC4 suite of contracts contains some

important changes around dispute resolution. Here’s
what you need to know.
The new NEC4 suite of contracts contains some
important changes around dispute resolution. Here’s
what you need to know.

Focusing on feedback from the NEC User’s Group and the

government’s aims for the sector, the Institution of Civil
Engineers recently launched the much-anticipated NEC4
contract suite.

The launch made clear that NEC4 aims to become the world’s
number one procurement suite of contracts. Key changes
promote flexibility, partnering, enhanced collaboration and
suitability for use on international projects. 
The spirit of the amendments to the dispute resolution options
is reflected in the section’s title change from ‘Dispute
Resolution’ to ‘Resolving and Avoiding Disputes’.

The importance of shared behaviour and active engagement in

resolving issues before the need for formal dispute resolution
is a key feature of the amendments to Option W1, Option W2
and the new Option W3.

The addition of a Dispute Avoidance Board (DAB) in new Option

W3 also mirrors a longstanding feature of the FIDIC contract
suite and is specifically aimed for use on international
projects.

Multi-tier dispute resolution: Options W1 and W2

Amendments to Options W1 and W2 now require the initial
referral of all disputes to the parties’ senior representatives
specified in the contract data.

Under Option W1 (used where the Construction Act does not

apply) this initial referral process is compulsory before you can
escalate a dispute further.

Option W2 also envisages that the parties should refer a

dispute to the senior representatives in the first instance, but
confirms that the parties can still refer a dispute to
adjudication at any time.

The drafting committee were critical of the right to adjudicate

at any time under UK law and suggested this should be
reconsidered by parliament as a right that does not always
help to resolve disputes.
It is clear from the drafting of the new senior representative
process that the NEC has tried to walk the line between
preventing the process from becoming longwinded and open to
abuse, while allowing the parties flexibility to make the
process work as they wish.

“The importance of shared behaviour and active engagement

in resolving issues before the need for formal dispute
resolution is a key feature of the amendments to Option W1,
Option W2 and the new Option W3”

For example, each party must submit a statement of case

within a week of notification limited to 10 sides of A4 and
supporting evidence. On the other hand, the senior
representatives can attend as many meetings and use any
procedure necessary to resolve the dispute over a period of no
more than three weeks.

At the end of the process, a list of issues is produced and the

project manager and contractor must put any agreed issues
into action. The process is also intended to be “without
prejudice” and no evidence of either the statement of case or
the discussions can be disclosed in subsequent proceedings.

Under both options, the intention is that the senior

representatives process should act as the primary dispute
resolution process, adjudication as a secondary process and
arbitration / litigation as a third and final resolution process.

The drafting of stages two and three remain (on the whole)
unamended. However, a new NEC4 Dispute Resolution Service
Contract has replaced the Adjudicator’s Contract and is also
intended to be used for the appointment of the DAB.
The new Dispute Avoidance Board: Option W3
This procedure, contained in new Option W3, is only applicable
where the Construction Act does not apply and requires the
parties to refer all “potential disputes” to an impartial DAB
before they can escalate the dispute.

The DAB is formed of one or three members as identified by

the contract data. The objective of the DAB is to resolve
potential disputes before they become disputes.

The DAB visits site at specified intervals to inspect the

progress of the works and review any potential disputes.
Potential disputes are referred to the DAB between two and
four weeks after the notification to the other party and the
project manager. Alternatively, the DAB can take the initiative
to review potential disputes and ask the parties to provide
further information.

“The NEC4 clearly reflects a desire to promote the original

partnering ethos of the NEC, which has been its hallmark since
its inception”

Interestingly, the DAB is only empowered only to make “a

recommendation for resolving” a potential dispute. This
deliberately avoids giving any binding force to the DAB’s
decision, which may lead some to question the overall
practicality of the DAB process.

The concept of resolving ‘potential disputes’ before they

become ‘disputes’ is a laudable objective, but may give rise to
difficulties as a matter of law. The fact that only potential
disputes are referred to may prompt arguments as to whether
a DAB would have jurisdiction to act in relation to ‘potential
disputes’ which have already become ‘disputes’ by the time
they are referred.

Clause W3.3(2) provides that a dispute cannot be referred to

litigation / arbitration unless a notice of dissatisfaction is
served in relation to a recommendation of a DAB within four
weeks. It is unclear whether this is intended to convert the
DAB’s recommendation into a binding obligation.

On the one hand, the very concept of a ‘recommendation’

suggests it is not to become binding.

On the other, if the recommendation does not become binding,

Option W3 would not appear to provide for any way of resolving
disputes where a notice of dissatisfaction is not served, with
the result that any preference for arbitration (which is more
likely, as Option W3 is intended for international projects) is
likely to fall away in favour of local court proceedings.

What it means
The NEC4 clearly reflects a desire to promote the original
partnering ethos of the NEC, which has been its hallmark since
its inception.

The changes to the dispute resolution provisions are intended

to be a step in this direction by encouraging earlier active
engagement and to open up the NEC to greater international
use.

Time will tell whether this purpose has been sufficiently

achieved to allow the NEC to challenge the dominance of the
FIDIC suite.
Rebecca Rous is an associate in the ICE disputes team at CMS