Clear contractual communication is a key component of NEC3 contracts. A UK court case last year highlighted that clarity of communications is just as important during the formation of an NEC contract to avoid subsequent costly disputes when NEC turns out not to apply.
Main contractor Merseylink Civil Contractors and subcontractor Ground Developments were involved in construction of the £600 million Mersey Gateway, a new six-lane toll bridge over the River Mersey between Runcorn and Widnes, due to open in autumn this year.
In June 2015, the main contractor invited Ground Developments to tender for a deep soil-mixing subcontract under the NEC3 Engineering and Construction Subcontract (ECS). Meetings took place later that month and there was correspondence about rates, resulting in Ground Developments being notified as the successful subcontractor.
ECS adopted but not signed
The parties then started discussing the terms and conditions of the ECS. However, even though the contract had not been signed, the main contractor instructed the subcontractor to start work on 10 August.
A month later, the subcontractor sent the main contractor a letter dated 8 August stating it had not signed the ECS but had been instructed to start the works and was doing so in accordance with its own standard terms enclosed with the letter. This was repeated in letters dated 25 September, 9 October and 15 October, but the main contractor did not respond.
The parties subsequently found themselves in dispute about various things including payment, continuation of the works, the circumstances in which the subcontractor left site and repudiation of contract.
The subcontractor started an adjudication claiming payment of nearly £200,000 plus VAT. The subcontractor stated the dispute was, ‘the nature of the contract between the parties’. However, the underlying issue was the main contractor’s failure to issue pay-less notices in response to the subcontractor’s applications for payment.
In defence of the adjudication, the main contractor challenged the adjudicator’s appointment, made several other jurisdictional challenges and reserved its position in respect of adjudication enforcement proceedings.
Despite the main contractor’s efforts, the adjudicator awarded the subcontractor payment in full and decided that the parties’ contract was based on the subcontractor’s letter dated 8 August and not ECS.
Court enforces adjudication
The main contractor did not comply with the adjudication decision and raised seven defences to enforcement, including arguments about the status of the unsigned ECS. The main contractor argued that the nature of the parties’ contract should be the subject of a contested trial.
Following a hearing in July 2016, the UK Technology and Construction Court judge rejected all seven defences and enforced the adjudicator’s decision. The judge held that the subcontractor had provided clear, written confirmation on a number of occasions of the terms upon which the works were being performed.
If the main contractor did not accept those terms, it did not make that clear – in fact it had encouraged and instructed works to continue. The judge said the main contractor was arguing contractual uncertainty as a tactic to avoid enforcement, but had failed to advance a case on what the contractual arrangements could be.
The conclusion for NEC users negotiating contracts is that failure to establish contractual arrangements before work starts can be a high-risk move. Furthermore, failure to respond to contract correspondence and keeping your cards close to your chest once work is underway is not a good tactical move either. It is most likely to backfire, forcing substantial payments that could have been avoided or at least compromised as part of a settlement.