The NEC and the Z clause

1 Introduction
2 The professional team
3 The engagement letter
4 Client behaviour
5 Law firms
6 The ‘NEC world’ should extend to construction lawyers
7 Potential solutions to the curse of the Z clause
8 Related articles on Designing Buildings Wiki

[edit] Introduction

The ‘curse of the Z clause’ was the focus of an article by Rudi Klein, President of the NEC Users Group, in the November 2015 issue of the group newsletter. Klein remarks: "Unfortunately, through the 'loophole' of option Z, far too many NEC contracts are amended beyond recognition and fail to deliver as they should".

Klein also states: "The Z clause option in NEC contracts was never intended to provide a carte blanche invitation to amend NEC contracts at will. On the contrary, its aim was to include additional contract conditions to suit the unique nature of the work involved."

"However, lawyers and quantity surveyors brought up on the concepts of 'provisional sums' and grants of 'extensions of time' continue to amend NEC contracts − through incorrect usage of Z clauses − to make them resemble the traditional contracts they are used to."

He concludes the article by saying, "Other than wringing our hands in frustration, what can actually be done?"

If Z clauses are to be reduced, and only used as intended, the NEC must reach out to and wrap its culture and philosophy around construction and projects lawyers.

This article explores some of the possible reasons for the prevalence of Z clauses, and concludes by offering possible solutions to reduce them.

[edit] The professional team

The NEC promotes collaboration, partnering, open and upfront communication, proactivity, and, of course, a spirit of mutual trust and co-operation. These are all worthy aims, but they are directed towards the relationships amongst the client, the professional team and the contractor. This culture does not extend to construction lawyers, who are typically on the periphery of, and not embedded within, the professional team. The effect is that construction lawyers:

Are often involved later rather than sooner on a project.
Lack the accumulated background knowledge that comes from attending key meetings and being involved in the project from the outset.
Do not experience the same level of information flow and open dialogue.
Are often treated with an air of caution by the professional team and contractor.
When eventually appointed, are not embedded to the same extent as the other key advisors (for example, lawyers are not involved at regular project meetings as a matter of course).

Against this backdrop, there is greater potential for construction lawyers to not fully understand the deal (including the risk allocation) and/or to have insufficient time to design and make a draft contract that reflects the parties' requirements.

The result is that a cautionary, protectionist and traditional approach is often taken, which leads to more Z clauses: ‘If I go with a cautionary and protectionist approach for the early drafts of the contract to protect my client, I can't be wrong, and the true risk allocation and deal will be flushed-out during the negotiation.’

This approach could have a tangible, adverse time and cost impact. For example, it protracts the negotiation, increases costs (e.g. legal fees; unnecessary letters of intent; contractor risk contingencies), and often leaves feelings running high.

[edit] The engagement letter

The engagement letter is the contract between the client and the construction lawyer's law firm. It is typically on the standard terms of the law firm (sometimes with agreed amendments).

These contracts rarely (if ever) spell out in enough detail or, indeed, at all that the client instructs their lawyer to design and make a contract that recognises a fair risk-share, respects NEC contracting philosophy, and that should only contain Z clauses ‘to suit the unique nature of the work involved’.. Nor do engagement letters ever state unambiguously that the client whole-heartedly buys into the NEC approach and, accordingly, willingly accepts a greater level of risk in the contract than in traditional forms of construction contracts.

The NEC suite of contracts requires that the client and the professional team/contractor spend time upfront – prior to entering into the contract – dealing with the detail and scope of the contractual relationship. For example, the NEC Professional Services Contract (PSC) – which on NEC projects would be used to appoint consultants (such as architects, engineers, and other designers) – includes provisions on early warnings, programmes, risk registers, communications, compensation events, and a spirit of mutual trust and co-operation.

The upshot is that the client and consultant have a clear contractual understanding from the outset that is underpinned with NEC principles, and, accordingly, the consultant has a sure and confident legal footing of what it should and not be designing and making.

Unless there is contractual sure-footedness in the engagement letter that clearly recognises the departure from cautionary and protectionist traditional contracting, construction lawyers will always carry uncertainty in their thinking and behaviour that if they do not cover all of the issues in a traditional way they will face a negligence claim.

Naturally, against an uncertain contractual backdrop, rather than designing and making a project contract that reflects the NEC philosophy and risk-sharing, construction lawyers are much more likely to adopt a cautionary and protectionist position, which, in turn, is likely to lead to more Z clauses.

[edit] Client behaviour

Clients often state that the NEC culture reflects their organisational values, yet they are regularly unwilling (or do not have the time and resource) to effectively engage and co-operate with their construction lawyers in the process of designing and making the contract so that it reflects the NEC approach.

In traditional contracting, a lack of client engagement is generally not an issue because, typically, most (if not all) risk is allocated to the contractor/consultant. However, in the more nuanced NEC world, designing and creating the contract needs a hands-on, bespoke approach and certainly needs much more and clearer collaboration, dialogue and instructions between client and their construction lawyer.

If construction lawyers are unable to fully understand the exact nature of the deal and its risk allocation because of a lack of client engagement or because – when push comes to shove – the client simply tells the lawyer that it wants a contract that ‘covers them’ (as often happens), it is not surprising that construction lawyers will, indeed, design and make an NEC contract that is overly protectionist, cautionary, and traditional.

[edit] Law firms

There is a perception that NEC projects equate to greater upfront cost, but the trade-off is that, in the long run, an overall ‘healthier’ project is achieved in terms of time, cost and quality. This seems logical given that the NEC approach requires the parties to really get to grips with the issues upfront, and not brush them under the carpet and store the problems for later.

This acceptance on cost, however, does not extend to the appointment of construction lawyers where the market position for pricing an NEC project is still benchmarked against what a construction lawyer would charge for an equivalent project that uses a ‘traditional contract’.

This is unsatisfactory given that to design and make an NEC contract – with a subtler and more bespoke risk allocation – requires more time and involvement than a contract that simply allocates all of the risk in a traditional way to the contractor / consultants.

By pricing to meet market expectations, it is unlikely that legal fees will carry sufficient headroom to proactively attend meetings, drill into the detail of the project and risk, and enter into frequent and two-way communication that is required by the NEC contracting philosophy.

If the project budget does not recognise that legal fees will be higher than for a ‘traditional contract’, it is likely that the cheaper and quicker default option of a ‘traditional contract’ filled with Z clauses will be produced.

[edit] The ‘NEC world’ should extend to construction lawyers

The NEC has developed an entire world to support its contracts, such as accreditations (e.g. the accreditation for ECC Project Managers), regular learning webinars, a plethora of training courses, a range of manuals and books, users' groups, a newsletter, and even has annual awards.

This support and learning is to be encouraged. However, it does not focus specifically on the role of the lawyer on an NEC project, even though, clearly, they are key advisors, and have a significant role in designing and making an NEC contract that suits the project. In this respect, they are not dissimilar to NEC's project manager and supervisor (albeit pre- rather than post-contract).

Rudi Klein notes that there is continued ‘incorrect usage of Z clauses’ by lawyers, and that they make NEC contracts ‘resemble the traditional contracts they are used to’. If there is a perception that lawyers are familiar with ‘traditional contracts’ and incorrectly use Z clauses this implies a disconnect between (i) lawyers and the NEC contracting approach and (ii) lawyers and the rest of the NEC project family (e.g. the client, project manager, and other key advisors).

Accordingly, a training and learning programme from the NEC (possibly run in conjunction with lawyers) that focuses on the role of and use of lawyers on NEC projects (targeted at both lawyers and the rest of the NEC project family) would be an opportunity to help break down barriers and get a greater number of lawyers familiar with and used to using NEC contracts. This, in-turn, should help to promote the correct use of Z clauses.

[edit] Potential solutions to the curse of the Z clause

Use the NEC PSC to appoint construction lawyers or have an NEC rider that can be bolted-on to engagement letters to establish the NEC culture within the lawyer's appointment.
A detailed template scope of service (either within the PSC or the protocol rider). This could be used for the purposes of pricing, but also creates contractual sure-footedness.
A contractual statement from the client of their acceptance of an NEC contracting philosophy (including risk sharing) and desire to collaborate and co-operate with their lawyer to achieve the NEC philosophy they require.
A checklist or menu of typical risk areas (e.g. site conditions and caps on liability) to marshal and promote dialogue between a client/project manager and their lawyer, so that there is clarity on the risk allocation.
A training and education programme developed in collaboration between the NEC and lawyers that is specifically tailored for lawyers using the NEC.
Extending the NEC's training and education programme so that all other stakeholders (including the client and other key advisors) know when to appoint the lawyers, what to expect of them, and how to get the best from them.
The promotion and recognition by the NEC that lawyers are an integral member of the project team (like architects, engineers, and project managers), whose early involvement would add value.
An accreditation programme to create a list of accredited NEC ECC lawyers.
Extending the NEC's awards categories to include a lawyer specific award for best use of Z clauses.\