The use of NEC contracts has grown significantly in Hong Kong in
recent years, having been mandated by the government for public works. The
prime motivation for introduction of NEC was that it is rooted in the principle
of 'mutual trust and co-operation'. Dealing with the contractual implications
of Covid-19 will be a test of whether NEC is delivering increased collaboration
and reduced disputes.
The NEC Engineering and Construction Contract, in its standard
form, is designed to provide clarity and encourage behaviour that delivers good
outcomes even in challenging situations. It contains an early warning process
under which contractors and project managers give prompt warnings of challenges
to price and programme and then engage and collaborate to seek solutions to
best avoid or mitigate the risks. This should be a perfect approach for the
On commercial matters, standard NEC is clear on events which
neither party could prevent and which it would be unreasonable for experienced
contractors to allow for. This surely covers the coronavirus and if such an
event stops the contractor completing on time then the project manager is to
give instructions. It is also a compensation event leading to both time and
money. The ultimate responsibility to decide what to do and absorb the losses rests
with the employer, the party that wanted the infrastructure or building in the
first place. Many would say that is entirely fair and reasonable.
Hong Kong amendments
But in Hong Kong the story does not end there. This is because
typically there are amendments to the relevant provisions including limiting
the remedy for events neither party could prevent to time only. As a result,
the question of financial compensation to contractors is more open with the
amendments taking NEC closer to the position under the forms traditionally used
in Hong Kong.
This does not mean that contractors cannot make claims. In most
situations, other provisions of NEC are likely to provide options for financial
recourse. For example, contractors may be able to claim compensation events
arising out of changed requirements, delayed access, suspensions and failures
and breaches by the employer related to their handling of the coronavirus.
The real difficulty is that the amendments made to the standard
NEC make disputes and conflict more likely. The pursuit of financial
compensation is no longer based on a neutral event which nobody could prevent
but on asserting that the employer is changing things, restricting things,
preventing access and so on. That may generate a remedy but it does not feel
like the collaboration NEC envisages. It is more likely to generate arguments
and push back.
In many ways this illustrates the dangers of amending and making
significant changes to the risk balance of NEC which is widely regarded as a
modern, fair and collaborative contract. If the spirit of mutual trust and
co-operation prevails then hopefully claims for time and money arising from the
coronavirus will be addressed rapidly and fairly anyway but a review of the
current raft of amendments seen in Hong Kong would be welcome in many quarters.
Despite the prevailing spirit of mutual trust and co-operation
under NEC it is still a highly procedural contract with condition precedent
notice provisions. While the emphasis should be on engagement and collaboration
it is crucial to ensure timely notifications, both in relation to early
warnings and for compensation events.