NEC in Hong Kong: coronavirus will test 'mutual trust and cooperation'

Out-Law Analysis | 18 Feb 2020 | 11:20 am | 2 min. read

Hong Kong's construction projects are being affected by the novel coronavirus, officially Covid-19. Contractors will inevitably be looking for extensions of time and additional payment.

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.

Early warning

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 current situation.

Risk allocation

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.