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The New Construction Act – Amendments To NEC3 Contracts

October 5, 2011 | Construction, Construction Contracts, NEC3 Contracts

The NEC has now published the amendments it has made to the NEC3 suite of contracts to comply with the new provisions of the Construction Act, which will come into force in October.

In comparison with the rather more extensive changes made by the JCT in its new 2011 suite of contracts, the changes to the NEC3 contracts are much less detailed. Nevertheless, the changes to the NEC3 contracts do still reflect the key elements of the new Construction Act.

How do the amendments work?

In the NEC3 Engineering and Construction Contract, Engineering and Construction Subcontract, Professional Service Contract and Term Service Contract (the “full” NEC3 contracts), there are changes to the payment provisions in Option Y(UK)2 and changes to the adjudication provisions in Option W2.

In the NEC3 Engineering and Construction Short Contract, Engineering and Construction Short Subcontract and Term Service Short Contract (the “short” NEC3 contracts), amendments have been made using additional conditions.

What changes have been made?

Payment

The new Construction Act requires 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 “full” 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 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 “full” NEC3 contracts operate on the ‘payer-led’ basis, meaning that the certificate/‘payment notice’ is given by the payer, or on the payer’s behalf. The only exception to this is the Professional Services Contract, which operates on the ‘payee-led’ basis. Option Y(UK)2 of the Professional Services Contract has been amended to provide that the Consultant’s (i.e. the payee’s) invoice is classed as the ‘payment notice’ and must specify the sum the Consultant considers to be due and the basis on which that sum is calculated. 

It is important to note that unlike in the JCT 2011 contracts, the NEC3 contracts which operate on the ‘payer-led’ basis do not contain a contractual provision which expressly states 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 “full” NEC3 contracts, because the payee (e.g. the Contractor or Subcontractor) is expressly required to make an application for payment (under the “full” 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 “full” NEC3 contracts, Option W2 has been amended as follows:

  • The adjudicator is now permitted to allocate his fees and expenses between the parties to the contract.
  • 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.
  • 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 “full” 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 “full” NEC3 contracts to reflect the fact that under the new 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 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.

This article contains information of general interest about current legal issues, but does not provide legal advice. It is prepared for the general information of our clients and other interested parties. This article should not be relied upon in any specific situation without appropriate legal advice. If you require legal advice on any of the issues raised in this article, please do not hesitate to contact one of our specialist construction lawyers.

Wakefield Office

17 Navigation Court
Calder Park
Wakefield
West Yorkshire
WF2 7BJ
Tel: 01924 258719
Fax: 01924 257666
enquiries@hklegal.co.uk

London Office

28 Queen Street
London
EC4R 1BB
enquiries@hklegal.co.uk