Amendments to NEC3 Contracts
 

The NEC has published the amendments to the New Engineering Contracts (NEC3) suite to reflect the amendments to Part II of the Housing Grants, Construction and Regeneration Act 1996, required by Part 8 of the Local Democracy, Economic Development and Construction Act 2009 (LDEDC Act 2009).  The amendments are for use on contracts entered into after the effective date of the amendments (1 October 2011 in England and Wales, and 1 November 2011 in Scotland).

The amendments revise the adjudication provisions in Option W2 and the payment provisions in Option Y(UK)2 of the main NEC3 contracts. In the short NEC3 contracts, amendments have been made by incorporating additional conditions.

Although the NEC3 contracts incorporate the key elements of the amendments to the Construction Act, the changes are far less extensive than the changes made by the JCT in its 2011 suite of contracts.

NEC3: The key changes

Payment

The amendments to the Construction Act require all construction contracts to include a requirement for either the payer or the payee to issue a notice specifying the sum due for payment and the basis on which that sum is calculated (a "payment notice").  Construction contracts must also give the payer the right to issue a "pay-less notice" if it intends to pay less than the sum set out in a payment notice. 

The NEC has given effect to these changes by making two key changes to Option Y (UK) 2 in the main NEC3 contracts: 

The payment certificate which is issued by the Project Manager (or Employer, Contractor or Service Manager, depending on which NEC3 contract you are using) now constitutes the payment notice for the purposes of the Construction Act.  It must specify the amount due at the payment due date and the basis on which that amount was calculated.

The requirement to serve a notice of intention to withhold payment has been deleted. Instead, if the payer wishes to pay less than the sum set out in a certificate/payment notice, the payer must notify the payee of the amount the payer considers to be due and the basis on which that amount is calculated. This notice must be issued not later than 7 days before the final date for payment.

The majority of the main NEC3 contracts operate on the "payer-led" basis, meaning that the certificate/"payment notice" is given by the payer, or on the payer’s behalf¹. However, unlike the JCT 2011 contracts, the NEC3 "payer-led" contracts do not expressly state what happens if the Project Manager (or Employer, Contractor or Service Manager) fails to issue a certificate/"payment notice". It was not strictly necessary for the NEC to include a provision specifying what happens if no certificate/"payment notice" is issued, because the provisions of section 110B of the Construction Act will apply in such circumstances.  Section 110B provides that if no "payment notice" is issued by the payer, then:

a) if the payee has already made an application for payment specifying the sum the payee considers to be due and the basis on which that sum is calculated, the sum applied for will become due; or

b) if the payee has not already made an application for payment, the payee can issue a "payee’s default notice" specifying the sum the payee considers to be due and the basis on which that sum is calculated.

However, the absence of an express term confirming this position may potentially lead to uncertainty.

The short NEC3 contracts operate on a different basis to the main NEC3 contracts, because the payee (e.g. the Contractor or Subcontractor) is expressly required to make an application for payment (under the main NEC3 contracts, it is optional for the payee to make an application for payment).

The short NEC3 contracts have been amended so that the payee’s application is now the "payment notice" and must specify the sum the payee considers to be due and the basis on which that sum is calculated.  If the payer (e.g. the Employer or Contractor) wishes to pay less than the sum set out in the application for payment, the payer must notify the payee of the amount the payer considers to be due and the basis on which that amount is calculated.

Adjudication

In the main NEC3 contracts, Option W2 has been amended as follows:

1. The adjudicator is now permitted to allocate his fees and expenses between the parties to the contract.

2. The existing provision which allowed the adjudicator to correct his decision within 14 days has been amended so that the time limit for correcting decisions is now 5 days.  This 5-day time limit is not a requirement of the Construction Act, but it is included in the amended Scheme, so it seems that the NEC has amended this provision to bring Option W2 in line with the amended Scheme. 

3. There is a new provision that requires the sum awarded by the adjudicator to be paid within 7 days, or by the final date for payment (if the final date for payment of that sum has not already passed). This complies with new section 111(9) of the Construction Act.

These amendments have also been included in the short NEC3 contracts using additional conditions.

Suspension

In the main NEC3 contracts, exercising the statutory right (created by section 112 of the Construction Act) to suspend performance due to non-payment is already treated as a compensation event. It was therefore not necessary to amend the main NEC3 contracts to reflect the fact that under the amended Construction Act the party who has suspended performance has a right to recover reasonable costs and expenses arising out of the period of suspension.

The short NEC3 contracts did not include any reference to the right to suspend performance for non-payment.  A new clause has been added to the short NEC3 contracts, which confirms that if the right to suspend performance is exercised, this is classed as a compensation event.

Summary

Whilst the amendments to the NEC3 contracts are quite brief, it is nevertheless important for all NEC users to appreciate these changes.

In essence:

The adjudication amendments include a revised "slip rule", with errors in adjudicators’ decisions to be amended within five days (section 108(3A), Construction Act 1996 (as amended)), provision for the adjudicator to allocate the fees and expenses of the adjudication (section 108A, Construction Act 1996 (as amended)) and a requirement to pay a sum awarded by an adjudicator's decision within seven days (section 111(9), Construction Act 1996 (as amended)).

The amended payment provisions include amendments to reflect the new payment notice requirements (section 110A, Construction Act 1996 (as amended)), and withholding notices are replaced by a requirement to give a "pay less notice" (section 111, Construction Act 1996 (as amended)).

A right to suspend has been included in all NEC3 contracts as a compensation event (this only affects the short contracts, where previously no right to recover compensation existed). 

¹The only exception to this is the Professional Services Contract, which operates on the "payee-led" basis.