Trust and the rights to compensation in NEC

Trust and the rights to compensation in NEC

The use of the word ‘trust’ in core clause 10.1 of the NEC3 Engineering and Construction Contract (ECC) imports the legal principles underlying the concept of a trust into the contract, because this is what the words of 10.1 say: ‘The Employer, the Contractor…shall act… in…trust’.

The laws of trust govern the manner in which a trustee may deal with the trust property held by the trustee for the benefit of a third party. The laws of trust prohibit the trustee from utilising the property for its own benefit, or acquiring a benefit arising from the property for its own benefit, or detracting in any manner from the property to the prejudice of the beneficiary.

As neither the employer nor the contractor actually hold the property of the other for that party’s benefit, core clause 10.1 makes use of the reference, ‘in the spirit of…trust’, which obliges each party to conduct itself with regard to the other party as if it were holding that party’s property in trust.

Legal obligation

Arguably clause 10.1 is the only clause in ECC which is structured as a legal obligation. To construe the term ‘trust’ in this clause as a social science term is to relegate the legal obligation in core clause 10.1 to mere window dressing, an expression of good intent, and unenforceable.

NEC was designed to remove the adversarial approach engendered in traditional construction contracts. This was achieved by encouraging the parties to work in harmony with each other, which in turn is dependent on each party knowing that the other party may not do anything to the prejudice of such party’s accrued rights. It is only once the parties are assured of this protection that they can commence acting in co-operation with each other, and fulfil the goal of the project in partnership and in strict compliance with the terms of the contract.

The legal concept of trust in the contract does not involve a party having to put the interests of the other party ahead of its own interests, but it does prohibit a party from detracting from the contractual accrued rights of the other party, in the same way as a trustee is prohibited from detracting from the trust property to the prejudice of the beneficiary.

The importance of the principles of the law of trust in the structure of NEC contracts becomes evident when viewed against a backdrop of prohibition on parties to detract in any way from the accrued rights of the other party.

Compensation rights

For example, ECC project managers, employers and adjudicators often wrongly hold that assessment of a compensation event must be made at the date of the assessment, no matter how late the assessment is made, and not at the date the compensation event first comes into existence.

The error has resulted in parties being obliged to wade through voluminous site diaries, minutes, reports and correspondence in an attempt to establish what took place on site after the advent of the compensation event. These complex and costly investigations, which are required in other construction contracts, should not be required in ECC.

In ECC, a compensation event is assessed as the effect of the compensation event upon, ‘the forecast Defined Cost of the work not yet done’ (core clause 63.1). The work not yet done is the work reflected in the accepted programme applicable at the advent of the compensation event, which is when the party first acquires the right to a change in the prices. It is in respect of this forecast that the contractor is compensated – it has nothing to do with the actual damage the contractor suffers as a result of the compensation event.

The compensation is not the same as damage which may be awarded to the contractor in other construction contracts. In ECC the contractor is placed, with regard to a compensation event, in the same position that the contractor was when it first prepared its costing and tendered on the project, that is when it first forecast what the cost of completing the entire project would be.

The employer is prohibited by its obligation in core clause 10.1 from detracting in any manner whatsoever from the contractor’s rights arising from the compensation event.
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