Hong Kong SAR NEC forms encourage proactive communication

The rules overseeing communications between parties are set out in clause 13 of the NEC engineering and construction contract. These rules prescribe the forms of communication that may need to be shared between parties, including instruction, notification, submission, acceptance and various certificates. Some provisions also specify clear timelines for submissions and responses, to further ensure clarity and efficiency.

The NEC4 also includes clauses covering the notification of compensation events (CE) and early warning procedures which are intended to encourage mutual trust and collaboration between parties.

Understanding and observing the NEC’s unique requirements for communication, early warnings and notices can help contracting parties pro-actively manage risks, avoid disputes and achieve their project objectives.

Rules overseeing communication

The NEC dedicates clause 13 to rules overseeing communication between parties.

Under clause 13.1, each communication must be in a form which can be “read, copied and recorded”. In short, the parties should put all communications in writing. There is no strict requirement regarding what form or transmission method the communication must take. The NEC4 User Guide demonstrates the width of clause 13.1, as it covers emails, post, telexes, cables, faxes and documents stored on disk, magnetic tape or other electronic means.

Clause 13.2 sets out the timing requirement for communication. If the scope of the works specifies a communication system, then the communication takes effect when it is communicated ‘through’ that system. Where none is specified, the communication takes effect when it is ‘received’ at the notified address. With the demise of fax, telex and cable, email is the predominant mode of communication. Drafting a ‘deemed sent and received’ for emails can present challenges as this depends on external confirmation, outside of the sender’s computer system.

Clause 13.3 is unique to NEC. It is a wide clause, as it applies to any express requirement in the contract which requires a reply to a communication. Where it applies, it places a positive obligation on the parties and - more importantly - on the project manager to reply within the ‘period for reply’ set out in the Contract Data Part 1. ‘Part 1’ means the period is set by the 'employer' (as defined by the contract) and not by the 'contractor'. The period for reply can be taken to be the same for all the parties.

Failure of the project manager or supervisor to reply within the period for reply may cause a CE to occur, in line with clauses 13.3 and 60.1(6). Even so, the response period may be extended by mutual agreement, in line with clause 13.5.

Clause 13.4 is another unique clause, where rejection by the project manager forces them to justify their grounds for rejection. The project manager is required to state the reasons in sufficient detail to enable the contractor to correct the matter. The clause clarifies that it is fine to withhold acceptance if more information is needed to assess the contractor’s submission fully.

Clause 13.7 is perhaps the most unique NEC clause in this section, and the one most worth remembering. It requires that all notifications or certificates be communicated separately from other communications. This is to ensure that important contractual notices are not being overlooked or hidden away in minutes of meetings or generic emails.

Clause 13.8 is a timely reminder to the parties as to whether the project manager’s withholding acceptance of a contractor’s submission is considered a CE. When the project manager withholds acceptance for the reasons stated in the NEC - for example, in line with clause 13.4 - clause 13.8 reminds the parties that this is not a CE. On the other hand, when the project manager withholds acceptance for a reason not stated in the contract, it amounts to a CE in line with clause 60.1(9).

Notification of compensation events

Core Clause 6 of the NEC deals with CEs, and notification is an important part of the process of claiming and assessing CEs.

Certain CEs arise from the actions of the project manager or supervisor, for example giving an instruction, issuing a certificate, changing an earlier decision, or correcting an assumption.

When the project manager communicates such a decision, they are obliged to notify the contractor of a CE at the time of that communication, in line with clause 61.1, and include in the notification an instruction to the contractor to submit a quotation – that is, to make a claim. However, if the project manager does not give this ‘notice’ to the contractor, although they would technically be in breach of contract, they might secure a slight advantage by not duly ‘reminding’ the contractor to submit a claim for a CE. The eight-week time bar in clause 61.3 does not apply to this category, so the failure of the project manager is unlikely to permanently prejudice the contractor’s opposition.

On the other hand, if the CEs arise from other events, the contractor must notify the project manager of the CEs. Clause 61.3 provides that:

• the contractor is required to notify the project manager of an event which has happened or which is expected to happen as a CE, if the contractor believes that the event is a CE; and
• if the contractor fails to notify the project manager within eight weeks of becoming aware that the event has happened, they waive all their rights to costs and extensions of time.

Knowing when to notify the project manager

The choice of some concepts by NEC are debatable – for example ‘beliefs’ as a concept is not used in other standard forms as criteria to start the time-bar clock ticking, because it is highly subjective and difficult to prove. It is also entirely reasonable that the contractor may be aware that an event has occurred or will occur, but does not believe that it is or will be a CE.

However, the NEC4 User Guide explicitly states that the time limit starts when the contractor is aware that the underlying event has occurred, and not when the contractor becomes aware that it is a CE. As such, the contractor might be barred from notifying the CE, even if they do not believe it is a CE until it is too late.

The above scenario is hypothetical but may not be uncommon. A lot of events may or may not manifest themselves as CEs at a much later time. For example, the contractor may be aware of a virus outbreak in other parts of the world but does not believe it will affect the project. The contractor is not subject to the duty of notification at that point in time. However, if at a much later time, the virus stops the project work and the contractor becomes aware that it is a CE, it would become time-barred if the eight-week period has lapsed.

A more prudent approach for the contractor would be to notify the project manager of all events which may become a CE. This protects the contractor from the time-bar and is consistent with its duty to give an early warning. The burden will then be placed on the project manager to decide whether the events are CEs, in line with clause 61.4.

Early warning procedures

The early warning procedures set out under clause 15 are unique to the NEC and are intended to be a risk management tool. Early warning is both mandatory and reciprocal. It equally obliges the contractor and the project manager to notify the other as soon as either becomes aware of any matter which could increase the price, delay the project's progress or affect the quality of the works. These include matters such as delay in supply, insolvency of sub-contractors, discovery of unexpected ground conditions, effects of bad weather, or anything that could jeopardise cost, time or quality.

The early warning process is distinct from the CE process. While some early warning matters such as unexpected ground conditions may become CEs, some other matters may not. The intention of early warning is to allow the parties to collaborate to minimise the effect of the early warning matters, instead of placing blame. The NEC4 User Guide also adds that parties attending a meeting in line with the process “should be at their creative best” when seeking solutions. The duty to give early warning should arise irrespectively of whether the parties are aware or believe that the matters are or will become CEs.

The duty applies both ways. For example, an employer contemplating a variation should notify and involve the contractor at an early stage. This duty is not found in most other standard forms and it reflects the NEC philosophy to enhance collaboration between the parties.

Implications for parties

From the contractor’s perspective, the sanction of failing to give an early warning is interlinked with the CE entitlement. If the project manager decides that the contractor did not give an early warning of the event which an experienced contractor could have given, the CE would be assessed as if the contractor had given the early warning, in line with clause 63.7. The presumptions are that, had the contractor given the early warning, actions could have been taken to reduce costs and save time. The contractor’s entitlements are reduced accordingly.

From the employer’s perspective, NEC does not explicitly provide the consequences if the project manager fails to give the early warning. Applying the same presumptions, the sanction would lie in the project manager being obliged to give full entitlement of time and cost to the contractor which might have been reduced or avoided had it given the early warning. For example, if the employer notifies an impending variation and gets the contractor involved earlier, they might come up with ways to reduce the time and costs needed to implement the variation.

Given reference to “an experienced contractor” is incorporated in the sanction of failing to provide early warning, the safe approach for the contractor would be to report all events that may impact time and costs, even though the contractor might not subjectively believe that the events could have such an impact.

Co-written by Cynthia Chan and Jason Wong of Pinsent Masons.