The NEC suite of contracts, first published in 1993, marked a change from the industry standard. The underlying ethos of the NEC forms was to create a user-friendly, flexible contract that could be used for different types of construction activities, with different contracting strategies, anywhere in the world.

The goal was to produce a ‘project management tool’ for use throughout the project lifecycle and to assist parties in actually avoiding disputes. To provide more clarity and simplicity, the contracts are written in the present tense, using plain language, to avoid the ‘legalese’ used in more traditional construction contracts.

The other key feature of the NEC forms, introduced to encourage a collaborative approach to working on a project, is the overarching obligation for parties to act “in a spirit of mutual trust and co-operation”. Added to refl ect the outcome of the Latham Reports there has, and continues to be, much discussion regarding the meaning of this wording. Nonetheless, the NEC forms are popular with government departments. The Hong Kong government has used the NEC3 suite of contracts since 2009 but decided to use them more widely on government projects tendered in 2015-16. Various NEC3 pilot projects were launched, including the HK$2 billion community hospital at Tin Shui Wai and the HK$678m Happy Valley underground stormwater storage scheme. Government issued the NEC Practice Notes for Engineering and Construction Contracts (“ECC”) in March 2017, and for Term Service Contracts (“TSC”) in July 2017 to provide guidance in preparing and administering public works projects using the NEC form.

In June 2017, NEC launched the NEC4 suite of contracts, which has introduced important changes into the NEC Suite, including: 1. Two new forms of contract are being published, i.e. the Alliance Contract and the Design Build Operate Contract 2. Changes in terminology within the Suite – e.g. “Employer” becomes “Client” 3. Key changes to the core clauses, particularly, to oblige a Contractor to submit applications for payment, or otherwise it will lose its rights to receive payment assessments from the PM and payments from the Employer (unless the assessments and payments are negative!) 4. New secondary options, notably, to allow the Contractor to propose changes in Scope or Working Areas, which could achieve cost savings to be shared between the Employer and Contractor; and the introduction of the Dispute Avoidance Board (DAB) option According to NEC, “NEC4 is an evolution of the successful NEC3”. The new features purport to address some of the concerns raised in response to NEC3 and to facilitate more proactive management of projects. It remains to be seen exactly how the changes would be when put into application, operation and interpretation

(a) Case law update on concurrent delay exclusion

Concurrent delay is the occurrence of two or more delay events at the same time, one an Employer Risk Event, another a Contractor Risk Event, and the effects of which are felt at the same time (see Society of Construction Law Delay and Disruption Protocol 2017).

Concurrent delay is a controversial topic. A recent English High Court case provides guidance on the effect of express provisions on concurrent delay as well as the application of the prevention principle in certain circumstances.

Background

In North Midland Building Ltd v Cyden Homes Ltd [2017] EWHC 2414 (TCC), North Midland (the contractor) and Cyden (the employer) entered into a contract for the construction of a large house in the U.K. Both parties agreed to insert a bespoke concurrent delay exclusion provision into the contract, which read as follows:

“any delay caused by a Relevant Event which is concurrent with another delay for which the Contractor is responsible shall not be taken into account”

Subsequently, occurrence of multiple Relevant Events caused delay to the works, and the contractor requested an extension of time. The employer rejected most counts of the requested extension on the ground of the above concurrent delay exclusion term. The contractor sought declarations from the court on the effect of this provision. 

Court ruling

Mr. Justice Fraser found that the parties’ concurrent delay exclusion provision was effective because the meaning of the provision in the parties’ contract was clear. As a result, the contractor’s entitlement to extension of time was excluded in respect of concurrent delay for which it was responsible. Further, the court agreed with Coulson J’s reasoning in Jerram Falkus Construction Ltd v Fenis Investments In (No. 4) [2011] EWHC 1935 (TCC) that the prevention principle should not apply where the contractor could not show that the employer’s acts had rendered it impossible for the contractor to complete its works on time.

Conclusion

The judgment clarifi es the English court’s position on the effect of concurrent delay exclusions in construction contracts. We can anticipate that more employers will seek to include similar provisions in order to minimise contractors’ claims for extensions of time. Also, parties using bespoke agreements should be aware of their potential consequences as to the express provision excluding concurrent delay. In practice, the application of concurrent delay is rare because, with experts’ assistance, identifying the delay event is not very diffi cult. Nonetheless, parties should be aware of the effect of concurrent delay exclusions as it will have an impact on their future claims on extension of time.

b) Liquidated Damages (“LD”): recent legal developments

LD clauses typically stipulate a pre-determined sum to be paid if a party fails to perform certain contractual obligations. Commonly construction contracts contain such clauses, for example to deter late completion. The inclusion of LD clauses in contracts warrants special attention because LD clauses that are considered penal may become unenforceable. The previous English authority on penalty clauses was Dunlop Pneumatic Tyre Co Ltd v New Garage & Motor Co Ltd [1915] AC 79 (“Dunlop”). In Dunlop, Lord Dunedin held whether LD clauses are penal should be decided based on the following principles:

1. LD clauses would be penal if a stipulated sum is extravagant and unconscionable in comparison with the greatest loss that can arise from the breach;

2. LD clauses would be penal if the breach only concerns non-payment, and the stipulated sum is greater than the sum owed;

3. LD clauses would be penal when a single lump sum is made payable by way of compensation, on the occurrence of one or more or all of several events that cause different levels of damage; and

4. LD clauses may not necessarily be penal even if the consequences of the breach make it almost impossible to pre-estimate damages because such impossibility is no obstacle to the sum stipulated being a genuine preestimate of damage.

After more than 100 years, the English Supreme Court has departed from the Dunlop test in Cavendish Square Holding BV v Talal El Makdessi and ParkingEye Ltd v Beavis [2015] 3 WLR. The court recognised that there may be a need for businesses to deter another party‘s breach of the contract and therefore, ruled that deterrence is not necessarily a penalty if (1) there is a legitimate business interest and (2) the stipulated sum is not out of all proportion to the interest to be protected.

In ParkingEye, the court was asked to consider whether an £85 charge for overstaying at the car park was a penalty, and provided helpful guidance in determining whether the sum is out of all proportion to the business interest of the car park business (ParkingEye Ltd). The court considered various factors including the level of charges imposed by local authorities, the appropriate display of the charge to inform users, and concluded that the £85 charge was not a penalty because it was not extravagant or unconscionable in any respect.

Whilst English courts have started applying this new test, Hong Kong High Courts have been slow in applying the new English authority. In 2016, Hong Kong’s Court of First Instance and Court of Appeal handed down two judgments on LD clauses, both of which applied the old Dunlop test (see Brio Electronic Commerce Ltd v Tradelink Electronic Commerce Ltd [2016] 2 HKLRD 1449 and Evergreen (FIC) Ltd v Golden Cup Industries Ltd [2016] 5 HKLRD 636).

However, it is worth noting that judges from the District Court and Land Tribunal have applied the new test in their recent judgments. It is therefore likely that more Hong Kong judges will begin to adopt the new test in the near future.

In summary, the Dunlop test remains good law but this is likely to change in Hong Kong and such a change will affect how LD clauses can be drafted.