NEC X Options

NEC X options: Liabilities

Andrew Wooldridge-Irving, Associate Director and Alex Tolson, Consultant Surveyor, GVE 

Andrew Wooldridge-Irving and Alex Tolson with the sixth in a series of articles on NEC X options

REMINDER: Where any X options are planned to be included, they should be expressly indicated as such in contract data part 1. Furthermore, many X options also require supplementary information to be populated in either contract data or the scope, or both, to facilitate the effective operation of the procedure. Where this task is not undertaken, it may lead to complications in administering the contract.

In our initial article, entitled ‘NEC X options – Introduction’, we noted that the X options cover a wide variety of different topics, which makes it difficult to accurately categorise them. For the purposes of this, and other related articles, we have organised each X option according to what we consider to be the dominant theme, which for this article is ‘liabilities’. This theme has been associated with the following X options:

X15 – The contractor’s (subcontractor’s ) (service provider’s ) design – ECC, ECS, FMC, FMS

X18 – Limitation of liability – ECC, ECS, PSC, PSS, TSC, TSS, FMC, FMS, SC, DBO, ALC

Construction contracts can create numerous liabilities, which has recently been a ‘hot topic’ within the industry. To provide a definition a ‘liability’ may be defined as a legal responsibility which is generally linked to the occurrence of a particular event. A liability can arise from various sources including those within a contract, those imposed by statute or from a tortious act, although a liability may not actually be obvious and could even accrue over time. Construction contracts can create numerous liabilities, which has recently been a ‘hot topic’ within the industry, especially with the associated effects of Brexit, COVID and the war in Ukraine.

To mitigate against the possible consequences contracts can either exclude or limit a certain liability. These X options seek to limit particular liabilities and are examined in detail below.

The contractor’s (subcontractor’s ) (service provider’s ) design – X15

This option may be used where there is an express responsibility for design, with the scope stating what the ‘supplier’ is to design. Under the NEC ‘engineering’ forms the provisions relating to design are stated in the core conditions of contract at clause 21, although these do not appear within the ‘facilities’ forms and so are replicated within the option itself at X15.1 to X15.3.

Where there is responsibility for design, the intention of this option is to limit the liability to the skill and care normally used by professionals designing similar works or services, which creates a specific performance obligation equivalent to the standard of care in negligence. It is derived from the test established in the legal case of Bolam v Friern Hospital Management Committee (1957) 1 WLR 583, which is supplemented by the statutory requirement under the Sale of Goods and Services Act 1982 at s13. This obligation effectively creates a warranty.

Without an express ‘skill and care’ obligation, where the design and provision of the works, or services, is undertaken together then this gives rise to what is known as a ‘fitness for purpose’ obligation, which is well established in case law. This is further supplemented by the statutory requirement under the Sale of Goods Act 1979, s14 (as amended), which effectively creates a guarantee.

Consequently, it may be sensible to include a clause which specifically excludes a ‘fitness for purpose’ obligation to provide clarity on the intended liability position.The NEC ‘facilities’ forms further provide for adding to the definition of service failure, (defect under the NEC ‘engineering’ forms), which allows the intention of this option to operate consistently. This is because liability for a defect (service failure) due to the design only arises where the design was not undertaken using skill and care. Where skill and care was used then correction of a corresponding defect (service failure) is stated to be a compensation event.

It is noted that the ‘burden of proof’ position under NEC4 was reversed from that previously, whereby under NEC3 it was the supplier who was obliged to provide appropriate evidence of compliance. There is a further requirement to retain documentation and information for the stated period for retention, as specified in contract data, which replicates the requirement at clause 13.9 of the NEC PSC form. The cost associated with retention needs to be considered, especially as the main option selected also influences who pays for this (in part at least).

The final part of the option requires professional indemnity (PI) insurance to be provided in relation to claims arising from a failure to use ‘skill and care’ for design, which reciprocates the requirements at clause 84.1 of the NEC PSC form. The minimum amount of insurance and the period for which it is maintained are both stated in contract data. An issue to consider is whether a contract imposes design responsibility, especially where it is not obvious and any such requirement may be ‘buried away’ in the contract documentation. Where this is the case the absence of option X15 means that a ‘fitness for purpose’ obligation could apply, with PI insurance cover for this liability being almost non-existent.

To provide ‘boundaries’ for the consequences of potential risks, limitation clauses may be included in contract terms.It is noted that design could also apply under the SC, TSC, TSS, DBOC and ALC forms, although X15 is not included under any of these contracts. For the DBOC and ALC forms, however, the intention of the contract is very different and with the SC form the contract is essentially concerned with supply only. For the TSC and TSS forms, however, a similar situation may apply in common with the FMC and FMS forms, whereby design obligations may arise in connection with a task order (project order under the FMC and FMS forms). Where this is the case then a ‘fitness for purpose’ design responsibility could apply.

Note that the intention of option X15 does not expressly exclude ‘fitness for purpose’, but instead applies a ‘skill and care’ obligation. This also specifically relates to defects (service failures) arising from the design, not to the actual design itself. Consequently, it may be sensible to include a clause which specifically excludes a ‘fitness for purpose’ obligation to provide clarity on the intended liability position.

Limitation of liability – X18

Contracts give rise to both rights and obligations, which may be derived from either express or implied terms. The parties are required to undertake certain actions to complete their performance obligations, although where this is not sufficient it may constitute a breach of contract. Contracts often provide a specific remedy in the event of particular breaches, for example ‘liquidated damages’ under options X7 and X17, although there may be other remedies, including the law of tort, especially for negligence. The remedy flowing from a liability could extend to a significant value, depending upon the actual breach and the consequent effects.

One of the issues to consider is how far does a loss, which flows from a liability, continue for. This is referred to as ‘remoteness of damages’ which the court established tests for in the landmark case of Hadley & Anor v Baxendale & Ors (1854) EWHC Exch J70. These tests have been refined over the years, most notably by the following cases:

The commercial court in the ‘Sylvia’ case took the opportunity to consider the basic principles of remoteness of damages and development of these since Hadley v Baxendale. One of the issues to consider is whether ‘special circumstances’ applies, which were particularly relevant to the judgement in the ‘Achilleas’ case. It is noted that the ‘influence’ of Hadley v Baxendale continues even today, as can be seen in the recent case of Orchard Plaza Management Co Ltd v Balfour Beatty Regional Construction Ltd (2022) EWHC 1490 (TCC).

The total liability is stated to apply in contract, where a breach of contract occurs, tort, where a breach of a civil obligation occurs, or delict, which is similar to tort although applies within a civil law jurisdiction rather than a common law jurisdiction.

To provide ‘boundaries’ for the consequences of potential risks, limitation clauses may be included in contract terms. They should be both clear and obvious to be effective and must also comply with any requirements of the Unfair Contract Terms Act 1977, where applicable. NEC contracts generally set out the parties’ liabilities at core clause 8, with the liabilities separately defined under NEC4 rather than the ‘catch all’ position which was the case under NEC3. Option X18 provides for limiting various liabilities some of which apply to a generic type of loss, whereas others relate to a specific loss.

There are variances when comparing option X18 between the different forms of NEC contract, which are largely due to the purpose and intent of the contract form.

Common across all forms of contract, however, are the following matters: 

Where a limit is not stated in contract data then no limit will apply to that particular liability. The ‘end of liability date’ is an identified term and stated in contract data. The timescale is likely to be determined by either of the Limitation Act 1980, Latent Damage Act 1986 or the Building Safety Act 2022, which could mean that different timescales apply to different liabilities where determined by statute. Under all forms except the PSC, PSS and ALC, there is a total liability amount, as stated in contract data, for all matters arising under or in connection with the contract.

This amount does not include certain ‘types’ of amounts payable which are expressly listed as an ‘excluded matter’. The excluded matters are specific to each NEC form and may include one or more of the following:

The total liability is stated to apply in contract, where a breach of contract occurs, tort, where a breach of a civil obligation occurs, or delict, which is similar to tort although applies within a civil law jurisdiction rather than a common law jurisdiction. Where any contract assurance measures apply, check the wording of any associated bonds, guarantees and warranties for consistency of terms between the documentation and the contract terms. As a point of caution, note that liabilities is a particularly specialised topic and it is recommended that professional advice is sought in relation to any such matters.

In the last article in this series we shall be reviewing X options which relate to a collaborative approach. 

Andrew Wooldridge-Irving, Associate Director and Alex Tolson, Consultant Surveyor, GVE

awooldridge–irving@gvecs.co.uk

atolson@gvecs.co.uk

www.gvecs.co.uk

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