NEC4 option Z for additional contract conditions: clarity or curse?

KEY POINTS

• NEC4 option Z allows users to include additional conditions of contract, but they are frequently over-used or incorrectly used.
• Reasons to include Z clauses are to meet specific governance requirements of the parties and to meet specific project requirements.
• Users should ensure Z clauses are kept to a minimum, do not conflict with NEC standard conditions and processes, and do not alter risk allocation.

NEC contracts are frequently accompanied by pages of option Z additional conditions of contract. However, guidance from NEC on so-called ‘Z clauses’ is clear, that they should be kept to a minimum and used where necessary for project specific requirements.

The flexibility of NEC contracts, with the ability to choose payment option and select from predrafted secondary option clauses, is intended to suit particular procurement routes where other standard form contracts would need amendment. But option Z is often over-used or incorrectly used.

Reasons to include Z clauses

One argument for using Z clauses is that more clarity is needed as NEC contracts are relatively untested in the courts. However, many NEC disputes are decided in adjudications. But it may be that some additional conditions are valid where there has been experience of a standard clause being interpreted in an unintended way.

Another reason to include Z clauses is if there are company-specific clauses or processes, such as a requirement for an invoice to be provided, or to cover the parties’ governance requirements for anti-bribery, modern slavery or sanctions standard wording to be included in all contracts.

Indeed, NEC has published public-sector Z clauses addressing the Official Secrets Act, confidentiality obligations and site security. Crown Commercial Services (CCS) also has ‘boilerplate’ Z clauses covering admittance to site, anti-bribery and corruption, freedom of information, building information modelling, data protection and cyber risk. CCS took these clauses from a wide selection of government NEC contracts and consulted with the Infrastructure and Projects Authority to achieve a fair balance in risk allocation.

Project-specific Z clauses, including reference to other agreements or external processes that need to be complied with, are also likely to be needed, particularly on larger projects. However, processes that describe how the works are to be done should be included in the scope and not the conditions.

Common issues

A common issue is that there are too many Z clauses and they are not tailored to the project or the parties – they are simply a copy and paste of standard additional clauses without any thought as to whether they are appropriate. Any key provisions are lost in the sheer number of Z clauses and the contract becomes so unwieldy that it becomes difficult for the parties to comply.

Another issue is inconsistent use of language in Z clauses, such as introducing capitalised defined terms for terms that should be italicised and detailed in the contract data, and using a combination of the two. This creates ambiguity and uncertainty. Including Z clauses that ignore the existing NEC core clauses and selected secondary option clauses, or matters included in the contract data or scope, can lead to repetition and conflict or inconsistency.

Z clauses can also result in substantial changes to risk allocation. This can have particularly adverse effects on either party, which may well not be able to take on such risks or may take them on without fully appreciating the extent of such risk. This leaves gaps in coverage and potentially an unreasonably excessive amount of risk on the party least able to manage it.

Bringing clarity

Examples of Z clauses commonly seen as attempts to bring greater clarity to the existing NEC provisions include boilerplate clauses such as severability, survival after termination and no waiver. These clauses are well-established and are likely to be useful in interpretation of the contract, as long as they are not duplicating an existing clause.

It is still common to see Z clauses for issues such as assignment, confidentiality, collateral warranties and intellectual property rights that were not previously included under NEC3 contracts. However, since clauses to deal with these issues were introduced in NEC4 contracts, care should be taken in applying the same Z clauses to ensure consistency with NEC4 provisions.

A common Z clause is the ‘order-of-priority’ clause, which lists out the documents forming the contract in order of the priority in which they should be read in the event of a conflict. For example, this might establish that the conditions take precedence over the scope (or vice versa), or multiple documents forming the scope may be listed in order of priority.

The reality of putting together a contract, particularly on larger projects, is it can be difficult to be certain there are no contradictory items within the contract documents, and an order-of-priority clause gives comfort. However, care should be taken in relation to clause 63.10, which allows compensation events to resolve ambiguities or inconsistencies to be assessed using the interpretation most favourable to the party that did not write the scope.

But clause 63.10 and an order-of-priority clause may not provide much assistance where there is no direct conflict, as the courts will read the contract as a whole. They will assume as far as possible that the contract documents are construed as complementing each other, as was the case in RWE Npower Renewables Ltd v. JN Bentley Ltd [2014] EWCA Civ 150.

Reducing clarity

It may be argued that some Z clauses actually reduce clarity under the contract. Parties should be particularly wary of Z clauses that attempt to change the risk allocation and make the contract more onesided. This can mean that the mechanisms included by NEC to avoid expensive, lengthy disputes are removed from the contract, such as the following:

• Additional grounds for the project manager to withhold acceptance, making the project manager’s rights much broader and causing delays to acceptance.
• Deleting actions and time bars for the project manager and/or contractor in relation to compensation event provisions, meaning claims are likely to be saved up until the end rather than dealt with contemporaneously, as intended by the contract.
• Deleting ‘deemed acceptance’ following a failure to respond within the required times by the project manager (e.g. clauses 61.4, 62.6. 64.4). This can make the compensation event procedure open-ended and again may increase the burden of the parties at the end of the project.

Conclusions

NEC users will find it difficult in practice to avoid Z clauses. There will always be some additional clauses considered necessary or inevitable, particularly to tailor the contract to a specific project. The key is clarity. Z clauses should be projectspecific and carefully drafted in line with NEC style and language. Users should read the whole contract, making sure there are no conflicts with existing clauses or the scope created by inserting Z clauses.

Users can of course look at previously drafted Z clauses, but they should not just copy and paste them into the current contract – they need to make sure the clauses are appropriate to the project.

Finally, users need to think carefully before changing the risk allocation in the standard NEC contract. This could create additional costs and disputes in the longer term, or may even result in a higher contract price at the outset.