New terms for old

Introducing the 2005 editions of the JCT and NEC standard form contracts

The Journal, October 2005, page 50

This year has seen two particularly significant events in the field of standard forms for construction and engineering contracts. The Joint Contracts Tribunal (“JCT”) has published its new suite of JCT 2005 contracts, and the Institution of Civil Engineers (“ICE”) has published the third edition of the New Engineering Contract. Both of these contracts make changes to the existing contracts and also introduce new contracts to the JCT and NEC families.

JCT 2005: a new mix

The JCT contracts and their Scottish versions produced by the Scottish Building Contracts Committee (“SBCC forms”) are the most popular standard forms used for the construction of buildings. The new JCT 2005 suite revises and updates the contract forms, amalgamates certain of the forms and introduces brand new additional forms, as a simplification and tidying up process. In particular, the JCT 98 standard form local authorities and private editions have been merged to form the “Standard Building Contract”, which comes in versions with quantities, with approximate quantities and without quantities. These forms can be used where sectional completion is required.

On the design and build front, the new main contract is the “Design and Build Contract”, which again can be used by both private and local authority employers and can also allow for sectional completion. A notable feature of this contract is that it preserves the position under the existing “With Contractor’s Design” contract, in that the contractor is only required to complete the design for the works. As with previous versions, there is no single-point responsibility for design and construction. In fact, the demarcation in design responsibility between employer and contractor is now clearer in that the contractor is now stated not to be responsible for the contents of the employer’s requirements or for verifying the adequacy of any design contained within them. Therefore, as with prior editions of JCT, if the developer wishes to achieve true single-point responsibility and hold his design and build contractor responsible for all of the design and construction, he must amend the form to provide that the contractor is responsible for the whole of the design – not just for completing the design.

The old and familiar heading in clause 25, “Extensions of time”, has now gone, to be replaced with the more modern concept of “Adjustment of completion date”. This is a recognition that the parties may wish to agree to accelerate the works. Other changes to this area of the contract include a requirement that the architect is now required to state the time allocated to each relevant event. There is still a requirement to use best endeavours to prevent delay, but in the event that delay transpires, the contractor is to do all that may reasonably be required to the satisfaction of the employer to proceed with the works.

Third party rights and warranties

Perhaps one of the most radical changes to the terms of the new JCT contracts is the position on third party rights. The JCT Major Project Form introduced in 2003 envisaged some developers and their funders and tenants relying on a schedule of third party rights in place of the usual collateral warranties. This position relied on the provisions of the English law Contracts (Rights of Third Parties) Act. The Major Projects Form was intended for use by experienced developers and contractors. However, the JCT has now allowed for the option of a schedule of third party rights to be granted to named third parties in JCT 2005, in place of collateral warranties. In Scotland, the SBCC is hoping to produce Scottish versions of the JCT 2005 contracts by the end of the year. It remains to be seen what position the SBCC will take on third party rights. The Scottish Major Project Form follows the English lead and provides for a schedule of third party rights in favour of named third parties. The Contracts (Rights of Third Parties) Act does not apply in Scotland, so these third party rights depend on the common law (the ius quaesitum tertio). There is a great deal more uncertainty about the application of the ius quaesitum tertio. It is undoubtedly the case that developers, tenants and funders in Scotland will remain keen to receive collateral warranties.

NEC 3: a successful model

This year’s second particularly significant event was the publication of the third edition of the New Engineering Contract (“NEC 3”).

The first edition of the NEC was published by the ICE in 1993, and was endorsed and supported by Sir Michael Latham in his Constructing the Team. The contract was renamed the “Engineering & Construction Contract” for its second edition, republished in 1995, at which time it was amended specifically to take account of Latham’s recommendations. The NEC is not intended purely for use in engineering projects – it is intended for use in a wide range of situations, and it has achieved widespread success. The form has been used in projects as prestigious as the Channel Tunnel Rail Link, Heathrow Terminal 5, NHS ProCure 21 and the Eden Project. NEC 3 has been recommended by the Office of Government Commerce for use by public sector construction procurers on their construction projects.

Collaborative contracting

The ICE has described NEC 3 as representing an “evolutionary rather than revolutionary change” to the second edition, the emphasis being very much on sound project management principles and practices. The ethos of the contract has always been to encourage collaborative relationships amongst the parties to a project, on the basis that co-operative management of construction projects will reduce the risks inherent in developments – the contract has always sought to embrace many of the advantages of partnering-type procurement. This ethos is extended in NEC 3.

One of the key collaborative features of the NEC has been the requirement that the contractor and project manager give each other early warning of matters which could affect the cost, timescale or quality of the project. The contractor is encouraged to comply because failure to do so may reduce the payment to him for a related compensation event in that the project manager may assess the compensation event “as if” an early warning was given. Obvious matters requiring early warning would include design problems, discovery of unexpected ground conditions and bad weather. NEC 3 develops the use of the early warning system beyond its role in NEC 2. It does this by introducing the concepts of a “risk register” and “risk reduction meetings”. The risk register is a live document. Initially, it will contain risks identified in the contract data. However, any matters which are the subject of early warnings are added to the register and then discussed in risk reduction meetings, in order to solve the problems in question. This procedure allocates the actions needed for efficient management of specific risks and assists in identifying the time and cost consequences of risk events.

The other changes to the form include changes to the requirements for the provision of method statements, changes to the provisions for the extension of the defects correction period, new adjudication clauses and a controversial provision that the contractor cannot claim compensation for compensation events where it fails to give notice within eight weeks of becoming aware of the event in question.

The framework concept

However, probably the most interesting new feature of both NEC 3 and the new JCT 2005 suite is the introduction into both families of contracts of standard form framework agreements.

The concept of the framework agreement has its roots in the idea that the scope for innovation, improvement and learning in developments is greater if a production team can stay together for more than one project. Framework agreements are one method in particular which encourages long-term relationships. In practice, a framework agreement is an umbrella agreement put in place over a set term, under which specific packages of work can be instructed as they are required. Both the JCT 2005 and NEC 3 framework agreements incorporate partnering principles, such as obligations that the parties will act in a spirit of mutual trust and co-operation.

The introduction of the standard form framework agreements is another reflection of the general trend in modern procurement towards collaborative working, for the mutual benefit of the parties. However, that goal cannot be met simply by the professional institutions providing good quality standard forms. Parties in the construction industry must work to achieve that goal in the real world – and their legal advisers must help by encouraging collaborative forms of procurement and providing realistic and commercial drafting of contracts.

Calum McIver is an associate with DLA Piper, Edinburgh