AR20318 parties in the contract work as a

Construction Law
University of Bath
Faculty of Design & Engineering
Department of Architecture & Civil Engineering
Table of Contents
NEC & JCT: Philosophy and Background 3
NEC & JCT: Comparison of Features 4
The NEC Approach 6
Duty of Care 8
Measure and Extent of Damages 9
The complimentary nature of Contract and Tort 10

1.1 – NEC & JCT: Philosophy and Background.

The NEC was first published by the ICE in 1993 as a result of the discontent with the other forms of contract. They wanted to create a contract that moved away from the traditional JCT litigating approach and could become of international use.
The NEC is a contract “written by managers for managers” 18. The underlying principle is that good management, co-operation and flexibility among the parties can lead to savings in cost and time that can be shared to everybody´s benefit.

NEC have 3 clear features:
They are written in simple, plain English to facilitate understanding.
They propose six main options (A-F) which vary on how to price the project, pay the contractor and allocate risks.

The different parties in the contract work as a team to deliver projects on time, budget and to the best possible standard.

The JCT contract is the most widely used in the UK. It was established in 1931 to set the standard for contracts in the construction industry. Broadly speaking, the JCT is a contract “written by lawyers for architects” 18 and is written in legal terms to leave scarce space to interpretation.
The JCT tries to avoid the Employer unpleasant surprises and therefore establishes a pricing method, leaving the settlement for the end of the project, when the Employer is less reliant on the Contractor.
Critics to the JCT approach say that it is prone to cause confrontation and frequently induces unnecessary litigation.

1.2 – NEC & JCT: Comparison of featuresProject Manager (PM) vs. Administrator
In the NEC, the Project Manager is the leader of a team that includes all the other parties (Consultants, Contractor and Subcontractors). He runs the project on behalf of the Employer, listens to the parties and takes the main decisions 5.

In JCT the contract administrator is the intermediary between Employer and Contractor. Traditionally this role is assumed by the architect 15. He is responsible for the supervision and valuation of the work but is not entitled to interfere with the arrangements made by the Contractor as long as they do not affect the result of the project.

Early Warning/Compensation vs. Notice and Loss Procedure
In the NEC, both the contractor and the PM are obliged to warn each other whenever they become aware of something that has or could affect performance of works, rise costs or delay completion. Mistakes incurred by either party that could affect these variables, must also be communicated 7.

Any early warning that increases the contractor’s total cost may then lead to a compensation event. If the event isn’t the contractors fault (for example weather or site conditions), it entitles him to claim for more money and/or time 8.

Whenever a compensation event arises, the contractor has to provide a quotation 8. This is basically a summary on how this event will affect the project and a proposal on how to overcome the issue successfully.
In the JCT 2016, the contractor has to notify the administrator as soon as any relevant matter affecting progress or the possibility of any loss and expense has occurred or can occur. He also has to give monthly updates on the issues until there is enough information to precisely determine the full amount. This tries to avoid claims being notified long after the event has passed. However, unlike in NEC, JCT does not have a specified maximum number of days for issuing the claim 16.
In this update, the contract administrator has time constraints while before he had no time limit. The initial claim has to be assessed within 28 days of being notified and for every update he has 14 days to respond 16.
Condition Precedents vs Final Accounts
In NEC, the contractor has the obligation of notifying on any compensation event within 8 weeks of becoming aware of it. If he fails to do so he will lose the right to claim any additional time/money 8. However, he does not lose this right if it was the PM who should have informed on the event and did not.
This procedure allows any issues to be discussed and resolved as they appear during the project instead of being left aside until the end.
In JCT, those issues not agreed are left out to be reconsidered in the final account at the completion of the project. The final account is to be done no later than 6 months after the project is completed 13.
This approach can be beneficial because revisiting the matter once the project is complete gives a much more objective view on the real extent of the problem. Sometimes issues that appear during the works seem bigger than what they actually end up being. However, once the project is completed, the parties are much less reliant on each other which can result in unfair agreement and litigation.

Risk Registers vs Standard Allocation of Risks
NEC3 requires the Project Manager to maintain a risk register 9. Any early warning that is notified has to be included describing the risks, the actions to avoid it and which party is going to be responsible for taking those actions.
Maintaining the risk register is an incentive for all parties. The PM wants to tackle early warnings effectively so the project has no delays and minimal extra costs. Moreover, the contractor does not want to lose any right to compensation and wants the project to be finished on schedule so he can be fully paid.

NEC3 also offers the PM and the contractor the right to call a risk reduction meeting to which they both have to attend to discuss and offer solutions to the risks.

The JCT 05 contract identifies four different categories of risk 15:
Risk of personal injury/death.

Risk of damage to property other than the Works and Site Materials.

Risk of damage to the Works and Site Materials.

Damage from the Excepted Risks.

These are defined in the contract and the responsibility for them distributed among the Employer and the Contractor in a set way.

Arbitration vs Litigation
In NEC disputes are normally settled through arbitration 10. In arbitration, the parties agree on an arbitrator. The arbitrator then listens to both sides, their arguments and evidence, and makes a final decision to settle the issue which must be accepted by the parties. This is a private and much quicker process than litigation. Arbitration costs are also much cheaper.
Under JCT, a disagreement in the final account frequently must be settled by litigation. Civil litigation 10 is settling disputes through court. In litigation, the parties have no say on who is going to be appointed judge. It is a public and legal process, much more formal than arbitration. It is also a longer process which could take months or even years. The costs of litigation are higher because the legal procedures can be very expensive. Small companies tend to lose the disputes to big firms because they have smaller resources. However, unlike in arbitration, decisions can be appealed (provided certain conditions).

1.3 – The NEC Approach
There are several aspects that make the NEC approach much more attractive than the JCT.

It makes it easier to avoid adversarial behaviour. Mutual mistrust leads to a more inefficient outcome than co-operation.

Its philosophy for co-operation, especially with the “gainshare/painshare mechanism” in Option C, provides a wider perspective on ideas and solutions. In this mechanism, the contractor may suggest ideas to improve the design which could cut costs and reduce the total time. This is an incentive for all parties because they will share the savings achieved.

The early warnings procedure allows any possible risks that could delay the project to be tackled immediately and be resolved during the project, not left until the end like in JCT.

The risk meetings include all parties to discuss possible solutions while in JCT’s notice and loss procedure the employer just ascertains the expense of the Contractor’s solution.

Settlement by arbitration is much more efficient in time and cost than litigation.

Nevertheless, the NEC approach also has some drawbacks:
As it is written in plain and not legal English, it is easier to understand but is also subject to misinterpretation which could cause disputes between parties.

Option C also has the drawback that if there is an increment in cost the expenses will also be shared between all parties.

NEC procedures are time consuming and resource hungry. You may find there are endless unproductive meetings and communications that require much manpower.

In NEC, unlike JCT, the contractor is subject to the risk of losing the right to claim any compensation events if he doesn’t notify them in time.

Settlement by arbitration cannot be appealed.

2.1 – Duty of Care
Duty of care is the legal obligation of ensuring the safety of others while executing any action that can possibly harm them.
A contract establishes a legal relationship voluntarily agreed between parties. Duty of care is not relevant to contract law because the obligations they owe each other are stated in the contract. It is important to understand that in contract law, due to the privity of contract, only the parties to a contract are able to sue or claim damages for breach of contract 24.

A duty of care establishes a legal relationship to a third party whom may have a contractual relationship or be a stranger. If the activity causes harm covered by the duty of care, this third party can claim damages for tort.

A duty of care is determined by:
The harm must be reasonably foreseeable
There must be proximity between the claimant and the defendant
It must be just, fair and reasonable to impose a duty of care on the defendant 25
There are some relationships, such as employer and employee or professional and client where a duty of care has already been established by the courts. The “reasonable person”22 behaviour tests whether or not someone has broken their duty.
Whenever an individual is proven to break the duty of care he owed to someone (intentionally or unintentionally) and damage them in some way, he has been negligent23. Negligence is the most common form of tort.

Then, a connection between the loss and the breach must be proven. This is called causation 29. The key test for causation is the ‘but for’ test which tries to determine if the damage was a result of the negligence occurring 32. It may happen that more than one party contributed to the loss, and in this case the responsibility must be distributed correspondingly.

After determining causation, the foreseeability test shows the remoteness 29 of the loss. This test basically questions if a reasonable person with the same professional skills as the defendant would have foreseen the loss. Having demonstrated these points, compensation for negligence can be claimed.
2.2 – Measure and Extent of damages
When the contract duties are breached, compensation can be claimed for the damages. Accordingly to whether this compensation is pre-established in the contract or not there are two types of damages, unliquidated and liquidated.

In unliquidated damages 18, a breach of contract occurs and the parties have no pre-calculation on payable damages. In this case the compensation will try to place the injured party in the same position as if violation of contract had not occurred. As there could be an infinite number of consequences, remoteness has to be considered. Only the losses which are reasonably considered direct result of the breach or any possible losses which both parties were aware of at the time can be recovered.
Sometimes, the contract will include a liquidated damages clause. This is a genuine pre-estimation of the required compensation for damages in case of violation of contract and a detailed explanation on how this amount was determined 18. If the contract does include it, then this will be the compensation paid even if the breach was of less amount.
However, it must not be mistaken for a penalty clause 29, which is not a reliable estimate and cannot be enforced as compensation. Some contracts include these clauses in case of delays, also including an extension of time.

Claiming compensation for tort aims to put the victim in the position that they would have been had the tort not been committed. Tort law covers compensation for consequential economic loss. These are financial losses derived from a physical harm to a person or property 27. Usually, in tort law, there is no compensation for pure economic loss. This is the term used for pure money claims not derived from physical harm 26. However, there are several cases in which it is claimable. One of those is the case of Negligent Misrepresentation 27, applicable to design professionals such as architects or engineers.
Compensation may be reduced because of the claimant’s conduct in cases where, even though the defendant was at fault, the claimant contributed to their own loss. This is contributory negligence 29. In addition, sometimes punitive damages are also awarded to the defendant so his actions are not repeated.
2.3 – Complimentary nature of contract and tort
Contract and tort law are needed to regulate the built environment. Under contract law, a legal relationship is established between the employer and the contractors but parties outside of the contract have no right to claim damages. Tort law covers the duties owed to these third parties. This implies that when loss occurs, the way to apply for compensation may be through contract law, tort law or both. This is particularly important in the construction industry, where the diversity of parties involved in a project is great, many of them not bound by contract.
Consider the case Edgeworth Construction v. ND Lea 27. In 1977, ND Lea prepared the engineering documents and drawings for the construction of a highway. The Province incorporated this into an Invitation to Bid with a disclaimer clause for the information furnished. Edgeworth was awarded the project, resulting in 50% loss of at completion, caused by errors in ND Lea´s documents and drawings. Edgeworth sued ND Lea (and the individual engineers who signed the drawings). They both sought dismissal of the claim on the basis that Edgeworth was not their client. They also tried to cover behind the disclaimer in the Invitation to Bid. Eventually the SCC upheld the dismissal against the engineers, but not ND Lea. The SCC found ND Lea liable for the economic losses since they knew that bids would be based upon its drawings. The individual engineers would only be liable if the bidders were relying on the individual’s design reputation (as opposed to the firm) and the designer knew of that reliance 27. This is an example of claim of damages for Negligent Misrepresentation that would not have prospered through contract law.

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