Out-Law Analysis 6 min. read
24 Jun 2024, 6:39 am
A thorough understanding of the types of compensation event (CE) clauses used in the New Engineering Contract (NEC), which is increasingly the standard form contract of choice in the Hong Kong Special Administrative Region’s public sector, is vital to avoiding potential disputes on construction projects.
CEs represent risks carried by the Client. Entitling the Contractor to claim for lost time or money, these clauses are at the heart of the equitable risk allocation for which the NEC suite of contracts is known.
The NEC engineering and construction contract (NEC4) includes 20 CEs in its core clauses spanning a wide range of events. Additional CEs can also apply, depending on which main option and secondary options the parties to the contract choose to include.
The CEs in the NEC4 vary substantially but can broadly be allocated into five categories:
These CEs can occur whether or not there has not been a breach by either of the parties. The types of instructions covered are:
This is another unique feature of NEC. The Client’s breach of contract is treated as a CE, and its effects are assessed by the PM in lieu of common law damages. This feature does raise the issue whether - when read with the exclusive remedy clause in 63.6 - damages at law are thereby precluded.
Some instances of this type of CE use similar language to what is commonly found in other contract forms, such as failing to give access to the site by the date shown in the accepted programme, and failing to provide material, facilities and samples for tests and inspections as stated in the scope.
Other instances of breach, however, use NEC’s characteristically plain language. These include where:
As the PM generally acts as the agent of the Client, his defaults fall within the risks carried by the Client.
Some instances of a PM’s breach use similar language to that commonly found in other contract forms, such as:
Other instances of a breach are unique to NEC and are drafted in plain English. These include:
Like many other construction contracts, the NEC provides for the possibility of certain ‘neutral events’ occurring through no fault of any parties. These include:
An important feature here is that the CEs do not cover a change to law unless the parties opt for it by including the secondary option clause X2.
This clause provides that any breach of contract by the Client which is not one of the other CEs is also a CE. The NEC has essentially absorbed all possible breaches by the Client into the CE framework.
Examples of such breaches of contract not covered in other CEs include the Client’s failure to pay, or other defaults by the PM acting as the Client’s agent. An interesting scenario would be if the PM acted in an unfair manner, for example when assessing CEs. Some cases have suggested that the Client is under a positive duty to remind the PM of their proper function, and failure to do so could be a breach of contract. Given that this breach is itself a CE, this would result in the rather odd situation of the PM having to assess their own unfair assessment.
Including the Client’s breach of contract as a CE must also be considered together with clause 63.6 which provides that ‘changes to the prices’, ‘completion data’ and ‘key dates’ are the only rights for the Client and Contractor in respect of a CE – that is, an exclusive remedy clause of sorts - and, if so, whether the Contractor would be entitled to the rights such as termination or interest when the breach is failure to pay.
While NEC provisions enshrine the spirit of mutual trust and collaboration, there are also ‘hard’ contractual clauses such as clause 6 - including the time bar in clause 61.3. It is ultimately incumbent on parties to put this spirit of collaboration into practice by ensuring effective communication between parties and resolving disputes as they arise.
Co-written by Zita Chan and Jason Wong of Pinsent Masons.
Out-Law Guide
03 May 2024