NEC issues coronavirus contractual guidelines
Procurement contract suite NEC has issued guidance for contractors navigating its contracts during the coronavirus.
The move came after NEC said it was experiencing high volumes of enquiries from clients and contractors querying the contractual complexities of sites shutting or being delayed due to the effects of covid-19.
Peter Higgins, NEC4 contract board chair, has outlined some key points of guidance for contractors looking to make sense of their obligations and legal standing, particularly in relation to Clause 19, which many contractors will be looking to utilise.
Higgins said: “While the impact of the virus will vary between different countries, and affect contracts in different ways, the main problem is likely to be the unavailability of resources – primarily people but also plant, materials and equipment.
“An early warning of this should have been given by either the contractor or the project manager so that discussion about the potential impacts could be held in advance, and mitigation measures identified. And as the impact of the virus develops, and restrictions are implemented which affect works, further early warning meetings should be held.
“Governments in some countries have imposed specific restrictions on movement of people and goods. In this case, if the site is located in that country and if Option X2 – changes in the law – has been incorporated into the contract, those restrictions would be a compensation event and the impact would be assessed in accordance with the contract.
“In the most severe cases, where work has had to be stopped or suffers delay, because of the virus, Clause 19 – prevention – may well apply.
“The situation could arise when people have been prevented from working on the contract or plant and materials or equipment cannot be obtained due to restrictions on movement. These restrictions may have been applied in another country where essential plant and materials or equipment were being sourced.
“It would be difficult to argue that, in such an extreme case, the contractor could have anticipated the issue and have allowed for it. If the impact stops the whole of the works being completed by the date for planned completion shown on the accepted programme, or being completed at all, then the provisions of this clause apply and the project manager should take control of dealing with the matter.
“An event which passes this test will also be a compensation event under clause 60.1(19), with instructions issued by the project manager to deal with the matter also likely to be compensation events, through a change to the scope, stopping or not starting work or other events identified in clause 60.1.
“However, it should be noted that the test in Clause 19 is fairly strict. For example, it is not sufficient that the works or a section of the works is delayed, the delay must impact the completion date of the whole project. A delay which does not impact the critical path of the programme or that can readily be overcome would not meet this test and be eligible as a compensation event.
“It should also be recognised that Clause 19 and the corresponding compensation event only applies in the case of delay, and do not apply where the only impact of the virus on the contract is an increase in cost.
“Where the effect of the virus is having, or going to have, a significant impact on the work in the contract, it would be sensible for the project manager to manage the effects of the virus on the works in the interests of the client. That may mean the project manager instructing the contractor to stop work or changing the scope in some way to overcome the difficulties encountered.
“Clause 19 has been written specifically to make the project manager take control, but whether or not the effect of the virus meets the limitations in this clause, the project manager should consider whether or not it would be sensible to issue instructions dealing with the matter, to help control the time and cost effect of the virus on the contract.
“Finally under the NEC4 Term Service Contract, which does not contain Clause 19 or the corresponding compensation event, the same approach for early warning and proactive management by the service manager should be followed.
“All parties should work together in accordance with clause 10.2 to best address any impact on the delivery of the service due to the coronavirus. While the Short Contracts do not include Clause 19, they do include the early warning procedure and (with the exception of the NEC4 Term Service Short Contract) provide for the event being a compensation event. This emphasises the point that the Client should be actively managing the effects of the virus to ensure that actions taken are in the best interest of the project.”
This guidance relates to the most commonly used Engineering and Construction Contract (ECC), although similar actions apply to all other NEC contracts. While advice is given in relation to the standard wording in NEC4 contracts, if modifications have been made, the contract should be reviewed to check whether this guidance still applies.