Defects under the NEC3 ECC Contract – The Contractor’s Perspective
The definition of a “Defect” provided in the NEC3 Engineering and Construction Contract, April (2013) (the “NEC3 ECC Contract”) is broad and non-specific, and creates uncertainty as to whether the problem experienced with the works is actually a Defect, or whether the problem experienced is, for example, a problem caused by incorrect specifications or site conditions.
A Defect is defined in 11.2 (5) of the NEC3 ECC Contract, as follows:
“A Defect is
- A part of the works which is not in accordance with the Works Information or
- A part of the works designed by the Contractor which is not in accordance with the applicable law or the Contractor’s design which the Project Manager has accepted.”
One possible interpretation of the definition of a Defect under clause 11.2 (5) of the NC3 ECC Contract is that a Defect is a part of the works, designed by the Contractor, which is not in accordance with the Contractor’s design which the Project Manager has accepted. If the definition of a Defect is read in this manner, it may appear to exclude defects in works which the Contractor has designed on acceptance of the design by the Project Manager, and as long as the works are executed in accordance with such accepted design. On a proper consideration of the terms of the NEC3 ECC Contract, and in interpreting the definition of a Defect in light of other provisions of the NEC3 ECC Contract, it is our view that the definition of a Defect should not be interpreted as excluding defects in the works which the Contractor has designed on acceptance of the design by the Project Manager, for the following reasons:
- there is no firm authority on the exact interpretation of the definition of a Defect as it is defined under the NEC3 ECC Contract, and reliance is placed on the various commentary and guidance notes issued in respect of this definition contained in the NEC3 ECC Contract;
- from the general commentary on the NEC3, it appears to be generally understood that:
-
- if a part of the works designed by the Contractor is not in accordance with the Works Information, then under Clause 21.2 of the NEC3 ECC Contract, the Project Manager would not have to accept it; but
-
- if the Project Manager does accept the Contractor’s design, and that design does not comply with the Works Information, then that would likely result in an instruction by the Project Manager to change the Works Information.
The above unpacking of the definition of a Defect under the NEC3 ECC Contract leads to the conclusion that any part of the works which is not in accordance with the accepted design would be considered a Defect, as it would constitute a part of the works which is not in accordance with the Works Information (i.e. it would be caught by the first leg of the definition of a Defect under the NEC3 ECC Contract).
It is further generally understood that the definition of a Defect under Clause 11.2(5) of the NEC3 ECC Contract excludes defects which are due to the design for which the Employer is responsible[1], which design will form part of the Works Information, and provided the Contractor has built in accordance with the approved design in the Works Information, such part of the works will not constitute a defect under this definition.
The ordinary English language definition of a “defect” is “a lack of something necessary for completeness or perfection; shortcoming; deficiency” or “an imperfection, failing or blemish.”[2] Accordingly, based on the ordinary and literal definition of what a defect is, if a part of the work (or the works) is not lacking something necessary for completeness or perfection, or it does not have any shortcoming and it is not inherently deficient, then it can be argued to not be defective.
The issue with the definition provided in the NEC3 ECC Contract of a Defect is that it gives the Employer great scope for claiming that a part of the works is a Defect which would have to be rectified at the cost of the Contractor.
Case Study
The detrimental effects for Contractors when it comes to the definition of a Defect under the NEC3 ECC can be explained in the following scenario:
- the Contractor and the Employer enter into a contract based on the NEC3 ECC Contract for the rendering by the Contractor to the Employer of engineering, procurement and construction services;
- the Employer provided certain information (Site Information and specifications) to the Contractor, and the Contractor relied on such information and based its design of certain equipment (known as analysers) on the data provided by the Employer;
- one portion of the information provided by the Employer related to the dust particle size present at the relevant Site where the works were to be carried out by the Contractor;
- relying on the information relating to the dust particle size provided by the Employer, the Contractor procured certain analysers that were to be installed as part of the Works;
- the Project Manager approved the designs of the Contractor for inter alia the analysers, which then formed part of the Works Information;
- some of the analysers were installed at the Site, however, the analysers were unable to operate on the Site. Following an investigation, it came to the attention of the Parties that the probe components of the analysers were not able to function on the Site, as the dust particle size of the dust particles present at the Site was too large (and was larger than the dust particle size specifications provided by the Employer to the Contractor);
- accordingly, the probe components of the analysers would have to be changed to probe components that could function with the larger dust particle size present at the Site;
- the analysers that had been installed by the Contractor as part of the works, were in accordance with the Works Information, despite these analysers not being able to function on the relevant Site due to the dust particle size being larger than that which the Employer had specified to the Contractor;
- the Project Manager notified the Contractor a Defect under the NEC3 ECC Contract that the analysers that had been installed had not been operating correctly since the installation thereof, and were accordingly, a Defect;
- pursuant to the Project Manager’s Defect notice, the Contractor replaced the probe components of the analysers with different probe components that were able to function with the size of the dust particles on site, at a cost to the Contractor;
- a further problem faced by the Contractor is that the Works Information on other projects for this Employer, where the Contractor must still install the same analysers, contains the same Works Information for analysers with probe components that cannot function on the relevant Site due to the size of the dust particles on Site. The Employer is not amenable to change the Works Information for the analysers that have not yet been installed, and requests that the Contractor motivate to it why this issue is not a Defect under the NEC 3 ECC Contract.
Due to the wide definition of what constitutes a Defect under the NEC 3 ECC Contract, the Contractor was put to the cost of replacing the probe components of the analysers forming part of the works. We are of the view that this issue should not have been classified as a Defect by the Employer, as the analysers were, in fact, in accordance with the Works Information. The Employer probably took the view that this issue is a Defect to avoid the Project Manager having to issue a notice of a change to the Works Information, which could give rise to a possible claim for a compensation event by the Contractor under the NEC3 ECC Contract, which may not have to be rectified at the cost of the Contractor.
It can also be argued that the analysers are not defective, based on the ordinary and literal meaning of the word “defect”. The analysers can function, it is just that they are not able to function on the Site due to site conditions (dust particle size). Accordingly, it is arguable that there is no Defect in the analysers, because the analysers are not lacking something necessary for completeness or perfection, do not have any shortcoming and are not inherently deficient. There is also no imperfection, failing or blemish inherent in the analysers.
An alternative course available to the Employer under the NEC 3 ECC Contract, is to have this issue classified as a fault in the design of the Contractor, which the Contractor would be liable for, however, if the Employer provided the specifications (including Site Information) on which the Contractor, acting reasonably and with the required skill, based its design, and it was the Employer’s specifications that led to the analysers not being able to operate on the Site, this could create room to argue that the Employer bares the fault in this scenario.
At the time that the Employer issued the Defect notification, the Contractor should have advised the Employer that it would be searching for the Defect without admitting that the analysers were defective in terms of the NEC 3 ECC Contract, and thereafter to notify the Project Manager/Employer of a compensation event under either of the following clauses:
- clause 60.1(12), which provides that the Contractor can claim a compensation event if the Contractor:
-
- encounters physical conditions (being the dust particle size) which are within the Site;
-
- which are not weather conditions; and
-
- which an experienced Contractor would have judged at the Contract Date to have such a small chance of occurring that it would have been unreasonable for him to have allowed for them; or
- Clause 60.1(14) read with clause 80.1, which provides that a Contractor can claim a compensation event if an event arises which constitutes an Employer’s risk, with one such risk being that claims, proceedings, compensation and costs are payable due to the fault of the Employer. The Contractor would have to substantiate an argument as to why the Employer is at fault in this instance, and why the Contractor, acting in accordance with the standard of care required in its design work, is not at fault.
With regards to the analysers that have yet to be installed on the Site, the Contractor should notify the Project Manager by giving an early waring that there is a matter that could impair the performance of the works in use, delay completion and/or increase the total cost of the prices, and instruct the Project Manager to attend a risk reduction meeting, as provided for in clause 16.1 read with clause 16.2 of the NEC3 ECC Contract, in an attempt to engage with the Project Manager and convince the Project Manager to make a decision to change in the Works Information. If the Project Manager makes a decision to change the Works Information, this will give rise to a compensation event under clause 60.1(1), which may entitle the Contractor to claim for a compensation event, provided that the Contractor must be able to show why the following exclusions to claim for a compensation event under clause 60.1 (1) do not apply:
- a change is made in order to accept a Defect – it having already been reasoned that the issue with the analysers is not a Defect as it is in accordance with the Works Information; and
- a change to the Works Information provided by the Contractor for his design, which is made either at his request, or to comply with the other Works Information of the Employer.
An alternative course that the Contractor can consider taking with regards to the analysers that have yet to be installed, is to rely on clause 18.1 of the NEC 3 ECC Contract, which provides that:
“The Contractor notifies the Project Manager as soon as he considers that the Works Information requires him to do anything which is illegal or impossible. If the Project Manager agrees, he gives an instruction to change the Works Information appropriately.”
The argument that can be used by the Contractor under clause 18.1 is that if the analysers that have yet to be installed as part of the works are procured on the basis of the Works Information and installed on Site, then these analysers will not be able to operate due to the probe components not being able to function with the dust particles size present on Site. In this event, the Works Information will make it impossible for the Contractor to install analysers that are able to function on the Site and carry out that part of the works. It should be noted by the Contractor that in taking this approach, care must be taken to not make any admissions that the Contractor is ultimately responsible for the works being fit for purpose.
Conclusion
Contactors should properly assess whether the problem is, in fact, a Defect when faced with a Defect notice issued by the Project Manager under an NEC3 ECC Contract. Due to the broad and non-specific definition of a Defect provided in the NEC3 ECC Contract, this could create scope for the Employer to have the Contractor rectify the works (or parts thereof), at the Contractor’s cost, by claiming there is a Defect, when it might be another issue that caused the works not to operate as intended.
From the case study in this article, Contractors should further attempt to negotiate with the Employer to shift liability for design in instances where the Contractor, in its design, is made to rely on information provided by the Employer. Alternatively, if the Employer is not amenable to this shift in liability, a Contractor should independently verify any information provided by the Employer, if the Contractor intends on relying on such information in its design under an NEC3 ECC Contract.
[1] See Keating on NEC3 by David Thomas QC (First Edition), page 128.
[2] Collins English Dictionary , Complete and Unabridged, Sixth Edition (2003), page 436.