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Use NEC contracts with caution, warns EC Harris

24 May 2013

Clients need to be cautious in choosing NEC contracts to procure construction work, EC Harris said this week as it revealed results of its annual survey into construction disputes.

Gary Kitt, head of contract solutions UK at EC Harris, said of the NEC contract, which is increasingly used in public sector projects: “We are seeing an increasing number of disputes with NEC contracts, clients and contractors don’t understand how different it is to JCT contracts and get themselves into a bit of mess”

“Often those who decide to adopt it aren’t the ones who have to use it. Most disputes arise because people choose the wrong type of contract – it’s crucial clients work out what they want to achieve.”

This year’s report, Global Construction Disputes: A Longer Resolution, is EC Harris’s third annual study into the duration, value, common causes and resolutions of construction disputes across the globe. The survey found that legal disputes in Britain’s construction industry are now taking, on average, 12.9 months to be settled compared to 8.7 months the previous year, an increase of 33%. It did not specifically break down disputes by contract numerically, however.

Top five causes of construction disputes in the UK during 2012

  • Failure to properly administer the contract
  • Failure to understand or comply with contractual obligations
  • Employer imposed change
  • Conflicting party interests
  • Incomplete and/or unsubstantiated claims

“Dispute values in the UK rose from £6.6m in 2011 to £17.7m in 2012. Despite this increase, the UK is still below the global average, which stands at £20.4m,” said Kitt. “The Middle East continued to experience the highest value disputes at £41.8m, whilst disputes in the US had the lowest value at £5.8m. Kitt added: “Construction projects are increasing in complexity, so when a dispute materialises its duration is not necessarily linked to its value, and so complex disputes can take equally as long to unravel, which is resulting in many disputes spanning a year or more.

Another reason for the slowdown in the UK is the Technology & Construction Court’s ruling that encourages the use of the pre-action protocol. This added step has tended to delay resolution of some major disputes.”Kitt said the survey also revealed that in the UK the popularity of adjudication is waning.

Adjudication was found to be the most common method of resolution in the UK, followed by arbitration and party to party negotiation.

The research also explored the frequency of disputes among joint venture (JV) arrangements. EC Harris found that, where a JV was in place, a JV related difference was likely to drive a dispute on approximately one in five (19%) occasions.

“Joint venture agreements are becoming more prevalent, particularly where a project is of such a large size and scale or there is a need because of licensing requirements for a local JV partner,” said Kitt. “These JVs are causing a significant number of cases, so more needs to be done to ensure that the JV itself does not end up in dispute.”

On the issue of NEC disputes, dispute specialist Knowles has also seen a clamour for places on its seminars to help industry professionals understand the contract better. David Latham, an executive director of Knowles, said: “From our experience, one of the main issues is that parties do not always gain the full benefits from NEC 3 in respect of time and cost predictability. This may be because they underestimate the resources required to administer the contract effectively or because they do not appreciate the requirements of the NEC 3 and thereby fail to follow the procedures included in the contract, which are a stimulus to good management.”

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