In this article the author discusses how evaluative mediation can be used to improve the efficiency of Change Control on Projects operating under NEC3 type of Contract.
The NEC3 Engineering and Construction Contract (ECC) is the leading contract within the NEC3 suite.
Relevant Core Principles
Clause 10.1 states that both parties to the contract “shall act as stated in this contract and in a spirit of mutual trust and co-operation”.
Compensation events are referred to in NEC3, and are similar to relevant events and matters referred to in other forms of contract, such as JCT contracts.
NEC limits the type of events that constitute Compensation Events (CE) to those listed in Clause 60.1.
If an event occurs during the course of the works that causes the completion of the works to be delayed then this may be a compensation event. Compensation events will normally result in additional payment being made to the contractor and may result in Extension of Time.
ECC Change Control Process
The lifecycle of a Compensation Event Notified by a Contractor starts with an event and is as follows:
1. An event triggers an 8 week period for Notification.
2. A Compensation Event is notified by the Contractor.
3. If the event is a reason to notify a Compensation Event, the Project Manager (PM) responds to the Notification requesting a Quotation.
4. The Contractor proceeds with the works while producing a quotation, or does not yet proceed with CE, and produces a Quotation within 3 weeks.
5. The PM Accepts the Quotation, or does not accept the Quotation and responds to the Contractor within 2 weeks.
6. (a) If the PM accepts the quotation the Compensation Event is implemented.
– If PM Assumptions were used and turn out to be incorrect, elements associated with those assumptions can be reassessed.
– If PM Assumptions were not used, implementation of CE is never revisited in terms of time or cost.
7. (b) If the PM does not accept the quotation:
– The Contractor revises the quotation within 3 weeks.
– The PM produces their own Assessment within 3 weeks.
8. If the Contractor is not satisfied with PM’s Own Assessment, the matter can be referred to adjudication.
Root Cause of Disagreements
The NEC3 conditions of contract envisage that the process for implementing a Compensation Event is carried out prior to the works being completed, and is thus thought to be a prospective regime. At the same time, the period to produce a Quotation allows for the Quotation to be produced after the works related to the Compensation Event are carried out. When assessing delay and associated costs after the effects of an event are known, prospective approach may fail to consider what occurred as a matter of fact and can arguably be in conflict with common law principles.
While collaboration and mutual trust are in the very heart of the NEC contract, it is often that the above fact that prevents Compensation Events being implemented in a timely manner. This may lead to lengthy positional bargaining period. On one hand, prospective assessment may cause the PM to question whether the Quotation was reasonable. On another hand,may place pressure on the Contractor to ensure he covers any risks. While there is a mechanism in the Contract through whichthe parties can mutually agree that the PM will use PM assumptions, on which the quotation should be based, it is not always being utilised. Instead, the parties delay reaching an agreement. This in turn, may lead to build-up of claims time distant from the events. Those are increasingly more difficult to assess, especially to individuals on project-level, without strong knowledge of delay and quantum analysis techniques, NEC form of contract and case law.
Agreement of a series of key Compensation Events as they arise can prove pivotal to the success of a Project. Using the Pareto Rule, 20% of the Compensation Events stand for 80% of the time and cost entitlement. Therefore assessing the 20% of the entitlement in a timely manner has the potential to significantly relieve the pressure placed on the Project and may allow the Project to continue in an uninterrupted way, at least from the contractual point of view.
NEC promotes notifying the client of any issues as and when they arise in an expectation that they can be identified, agreed as Compensation Events, quoted for and agreed in a timely manner. The reality is often far from ideal, which is why the author proposes that reaching agreements on time and cost elements of key Compensation Events should be expedited using Evaluative mediation as an integrated element of the Compensation Event mechanism.
mediation is a voluntary, confidential and privileged process in which a neutral person helps the parties reach a negotiated settlement. In terms of Evaluative mediation, the Mediator can use his own professional experience and knowledge to express opinions in order to empower the mediated parties to come to their own conclusions.
It is the author’s belief that the subtle, yet key differences between positional bargaining and mediation, make mediation a nostrum for the issue described above. mediation may just be the missing link between an inefficient process underlined by emotions and the ability to act truly in line with the spirit of the contract even in the most unusual circumstances.
mediation cannot take place unless the parties agree to enter the process. At any point it is possible for each party to walk out, when the mediation process will cease. As much as mediation can take place after a judicial recommendation, it may also be a mechanism adopted under the contract as first point of call when timely agreement of Compensation Event quotations is crucial to the delivery of the project.
The terms and conditions of settlement, in this case cost and time, are not binding until both parties are confident they can live with them. mediation therefore allows the parties to explore wide range of possible options together,something that would be often impossible via positional bargaining. While due to non-binding nature the mediator has no authority to make a binding determination, even if the mediation does not conclude in a settlement, it can still act a catalyst to settle after the event.
The mediation process is without prejudice and confidential to the extent permitted by the law. This allows the parties to exchange information and propose solutions in an environment where they can feel safe knowing that any concessions or offers made cannot be later used should the matter proceeded to adjudication or litigation.
Further benefits of mediation
The impact facilitated negotiations might have on agreeing the impact of Compensation Events early in the change life cycle poses a considerable improvement to the dynamics of Projects ran under NEC. mediation has the potential to minimise the cost of disruption, decrease the risk of damages to the relationship between the Client and the Contractor, as well as minimise the risk of disputes arising at completion.
While the author has considered the use of mediation throughout the regular Compensation Events process above, it could also be used to deal with more complex, unusual disputes arising from contractual ambiguities in order to manage the Project in line with the principle of mutual trust and co-operation.
Example – Coronavirus outbreak’s impact on Construction
At the time of writing this paper, the Coronavirus has caused a major disturbance to the construction industry in the UK.
The government’s guidance is that people should only go outside for food, health reasons or work (only if one cannot work from home) and should not meet others, even friends or family. When outside their households, people are to stay 2 metres (6 ft) away from other people at all times.
While from the common-sense point of view the above guidelines suggest construction sites should be closed, the commercial and legal point of view may not be as clear. The above guidance combined with the moral aspect and with the obligationsarising from the Health and Safety at Work Act 1974 increase the potential for Coronavirus outbreak to become a contentious issue.
The outbreak has triggered conversations around Force Majeure (FM) clauses and liability for delays and associated costs. As FM is a creature of contract, not common law, the consensus is that the outcome of the claims made against one another will depend on individual/ bespokecontract provisions.
It is the author’s personal experience that the options open for debate in unusual circumstancesare often limited. Both parties come to the table with a preconceived position and are looking to guard their contractual standing, regardless of any underlying interests.
The presence of an evaluative mediator, through private and joint sessions, and robust reality testing, would quickly discover those interests and would drive the negotiation towards a mutually acceptable settlement.
Perhaps in the above case, with a mediator on site, the parties could explore more equitable solutions that would allow them to put the time and cost argument aside and focus on true wellbeing of their staff. An example of such solution is reaching an agreement to a moratorium on Coronavirus related claims across the supply chain. It would allow the key resources to be deployed to deal with operational issues rather than contractual ones, while preserving parties’ rights for the time being. The details of such moratorium could be crystallised in either private or joint mediation sessions. By the end of the mediation both parties could walk away with a signed agreement that would give them sufficient amount of time to deal with operational impact of the outbreak as well as clear expiry date(s) of the suspensions as well as further timescales for notices once the initial crisis settles.
Whether it is the contractual mechanism for assessment of Change or extraordinary circumstances that arise during Project’s lifecycle under NEC3, the author believes that mediation could be successfully deployed to navigate the parties through the change process and agree Compensation Events, one at a time.
Director | Project and Forensic Services
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