When is a defect not a Defect under NEC3?

23 Jun 2016 | Contracts

In this article, Steven Evans explores the Defects provisions in the NEC3 Engineering and Construction Contract and provides a practical guide to their effect and use.

Defects in construction

Most of us will recognise a defect in construction work; steelwork may rust or a window may leak. However, a contractor’s liability arises only if the defect results from his breach of the contract; it could be the rusting steelwork is caused by an error in the engineer’s design, in which case, whilst the works could be said to be ‘defective’, they are not ‘defects’ under the contract.

But if the contractor is liable, common law dictates that the Employer corrects the defective work himself, and sues the contractor for his loss.

This is rather labourious; usually the Employer will allow the Contractor to correct the defect, being not only simpler solution but also fulfilling the Employer’s obligation, at common law, to mitigate his loss.

Construction Contracts

Most standard forms of construction contract enshrine that simpler solution by displacing the common law rules with a contractual procedure whereby, for a period after completion of the works (often called the defects liability period), the Employer is bound to allow the Contractor access to the defect and the Contractor is bound to correct it.

If the Employer fails to allow access and instead engages others to correct the defects, he may be unable to recover from the Contractor the full cost he incurred; rather, it would be limited to what it would have cost the Contractor if access had been allowed.

Conversely, if the Contractor fails to correct defects to which he has been given access within the timescale set out in the contract or if no timescale exists, within a reasonable time, the Employer would be free to engage others and sue the Contractor for the full cost of doing so.

Straightforward? But is it the same under NEC3? Yes………and no.

Defects under NEC3

To begin at the beginning with the definition of a Defect (note the capital ‘D’) at clause 11.2(5); Defects are the only defects the NEC3 considers to be the Contractor’s liability:

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.

The first bullet point is self explanatory, as is the first part of the second. The remaining part raises an interesting point; at first glance it appears to exclude defects in works the Contractor has designed on acceptance of that design by the Project Manager.

Further reading of the Contract reveals that is not the case, as any such work would be caught by the first bullet point as, if the Contractor’s design fails to comply with the Works Information, it is a Defect whether or not ‘accepted’ by the Project Manager.

The Procedure

Now we know what a Defect is, we can look at the procedure for correction.

Whilst the Project Manager has extensive powers under the NEC3, the custodian of quality is the Supervisor who exercises control over investigation, notification and certification. Control reverts to the Project Manager for acceptance of uncorrected Defects.

Both the Supervisor and the Contractor have a contractual obligation to notify the other of any Defects they may discover (clause 42.2); this obligation continues until the defects date (stated in the Contract Data and which marks the end of contractual defects liability). In addition, until the defects date, the Supervisor may instruct the Contractor to search for a Defect (clause 42.1).

On discovery of a Defect, the Contractor’s obligations are set out in clause 43:

• To correct a Defect, whether notified of it or not;

• To correct notified Defects within the defects correction period.

The defects correction period is stated in the Contract Data and commences:

• At Completion for Defects notified before Completion;

• On notification, for Defects notified after Completion but before the defects date; or

• When the Employer provides access to the Contractor such access being arranged by the Project Manager.

The Contractor’s obligation to correct a Defect within a defect correction period applies only to notified Defects. However, in practice all Defects which the Contractor is aware of must become notified Defects pursuant to clause 42.2 above. If the Contractor fails to notify he will be in breach of contract and, as a matter of law, will be prevented from taking advantage of his breach.

Accepting Defects

Clause 44 permits either the Contractor or the Project Manager to propose to the other that notified Defects are accepted and remain uncorrected. If the recipient of that proposal is prepared to consider that suggestion, the Contractor submits a quotation for a reduction in the Prices and/or the Completion Date. If the Project Manager accepts that quotation, he instructs a change in the Prices, Completion Date and Works Information accordingly.

There is also no facility for the Project Manager to make his own assessment. In the event the Project Manager wishes to accept the Defect but disputes the Contractor’s quotation, presumably that dispute can be put to Adjudication. However, the NEC3 Guidance Notes suggest otherwise, possibly as the procedure is voluntary.

Uncorrected Defects

These fall into two categories; the first, where the Contractor has failed to correct a Defect within the defects correction period after the Employer has provided access (clause 45.1). The second where the Contractor has failed to correct a Defect as the Employer has not given him access before the defects date (clause 45.2).

In both cases, the Project Manager assesses an amount to be paid by the Contractor at the assessment date and the Works Information is treated as being changed to accept the Defect.

In the first case, the amount assessed by the Project Manager and paid by the Contractor is the cost for the Employer to correct the Defect (whether later corrected or not). In the second case, the amount assessed by the Project Manager and paid by the Contractor is the cost for the Contractor to correct the Defect (whether later corrected or not).

Some observations:

• There are defined dates as to when a Defect becomes ‘uncorrected’, either on the expiry of the defects correction period or at the defects date. The Project Manager’s obligation to assess the amount the Contractor pays appears to be immediate on the happening of those dates and if he fails to do so, or if the Contractor disputes the assessment, it can be put to Adjudication;

• There is no requirement for the Project Manager to notify the Contractor of the amount he assesses; it is simply adjusted in the next payment certificate;

• No action is required to amend the Works Information to accept the Defect, it is treated as amended on the happening of the trigger dates above;

• The Project Manager assessment is likely to be in ignorance of the true cost of rectification;

• The Project Manager’s gets ‘one bite of the cherry’, if he gets it wrong and under-assesses the cost to the Employer, the Employer’s action is against the Project Manager not the Contractor (unless prevented by their contractual relationship).

The Defects Certificate

Contractual liability for Defects ends at the issue of the Defects Certificate. Under many standard forms such certificate is issued when all defects are corrected. However, under the NEC3, the Certificate is issued:

At the later of the defects date and the end of the last defects correction period (clause 43.3)

And is:

Either a list of Defects that the Supervisor has notified before the defects date which the Contractor has not corrected or, if there are no such Defects, a statement that there are none (clause 11.1(6)).

It’s issue also triggers the final payment to the Contractor.

Finally, the Employer’s rights in respect of latent defects are protected in clause 43.3:

The Employer’s rights in respect of a Defect which the Supervisor has not found or notified are not affected by the issue of the Defects Certificate.

For more information please contact us.

Written by Steven Evans who is a construction contract and commercial expert with particular specialism in NEC3, and is an NEC accredited tutor.

This article is for general information purposes only and should not be relied upon in any specific situation without appropriate legal advice. If you require that advice or wish to discuss any of the issues raised in this article, please contact us.

Contact Us

New Zealand Office

15 + 1 =

Phone: +64 (0)9 363 3749
Email: raine.selles@cmcasiapacific.com
Address:
 Level 26, PWC Tower, 188 Quay Street, Auckland 1010, New Zealand

Australia Office

8 + 5 =

Phone: +61 (0)7 3053 5012
Email: steven.evans@cmcasiapacific.com
Address: Level 22, 127 Creek Street, Brisbane, QLD 4000, Australia