NEC 4: what do the changes mean for sureties?

The NEC 4 suite of contracts has been hailed as the evolution of the NEC form. But what does this mean to the surety world?

What’s new? – key changes

Finality in assessments

Clause 53 introduces a new provision in respect of the Final Assessment. The process is now as follows:

• The Project Manager (PM) makes an assessment of the final amount due and certifies an amount for payment;
• The final payment becomes due no later than four weeks after the Supervisor issues the Defects Certificate or thirteen weeks after the PM issues a termination certificate;
• If the PM does not issue the final certificate, the contractor can issue one based on its own assessment;
• Clause 53.3 provides that the assessment of the final amount due is conclusive unless it is referred to the adjudicator within four weeks of the assessment being made;
• If the parties are dissatisfied with the decision of the adjudicator, the matter must be referred to the tribunal (court or arbitration) within four weeks of the adjudicator’s decision;
• If the matter is not referred to the tribunal within four weeks, the final assessment becomes conclusive (i.e. it cannot be challenged by the final tribunal, whether that is in court or arbitration);
• Under clause W1.4 of the NEC3, a party only had to notify the other party of its intention to refer the matter to the tribunal. So, the position is now more onerous for the party seeking to challenge any decision that it is unhappy with.

What does this mean for sureties?

As you know, under the previous NEC forms, it was always important to include a rider in bond wording because of the power of the PM to make an assessment of the sum which would be due to the employer (now referred to as ‘client’ in the NEC4 suite) following an event of default such as the insolvency of the contractor.  The PM’s assessment could only be a forecast because of the time at which it was undertaken.  In contrast, a surety would be agreeing by virtue of its bond to meet actual net damages sustained by the client under the contract.  Therefore, the rider was included to make it clear that the surety would not be bound by a mere assessment made by the PM.

It remains important to include an NEC Rider in any conditional performance bond.

However, now it is vital to consider amending the rider to clarify that the bond will not be responsive to a final assessment which is expressed to be conclusive. Unless careful provisions are drafted to cater for this amendment which is created by NEC4 the surety will lose its right to have the amount of damages and/or costs established and ascertained under the bond forever.

New termination provisions

Clause 91.8 introduces a new reason for the client to terminate the contractor’s employment: the carrying out of a Corrupt Act (as defined) by the contractor (i.e. an act of bribery).

Whilst this is a change to the NEC contracts, under most JCT standard form contracts, corruption is already a reason for termination and thus most bonds respond to the consequences of the contractor’s employment being terminated for reasons of corruption unless expressly excluded.

The provision does not extend to the acts of any sub-contractor and it remains to be seen whether the client may wish to include broader rights to terminate for breach where a sub-contractor commits a corrupt act. Look out for this amendment being made to the standard terms of the NEC 4.

Secondary clause X11 allows the client to terminate at will (i.e. where there has been no breach by the contractor). This is an onerous clause for the contractor.  The consequences if the client exercises this option are:

• The client may complete the works and may use any plant and materials to which it has title (P1);
• The contractor may be instructed to leave the site and to assign the benefit of any subcontract or other contract related to the performance of the contract to the client (P2);
• The contractor is entitled to be paid for (A1): 
• An amount sue assessed as for normal payments;
  • The defined cost for plant and materials;
  • Other defined costs reasonably incurred in expectation of completing the whole of the works;
  • Any amounts retained by the client; and
  • A deduction of any un-repaid balance of an advance payment.
• In addition, the amount due on termination also includes the defined cost of removing the equipment (A2) and a fee percentage applied to the relevant contract option (A4).

Again, this provision needs to be reviewed by the surety’s legal team and, depending on whether it has been amended (as is often the case), excluded or aligned with the specific bond provisions. For example, if a bond call is triggered by reference to the contractor’s employment being terminated (rather than a specific breach of contract), and then careful consideration will need to be given to limiting or excluding the termination at will so that it does not constitute a breach for the purposes of the bond.

As can be seen from a look at the key changes relevant to the surety market, the NEC 4 suite is very much an evolution and not a revolution.

If there are any points you wish to discuss or proposed wording which you wish for us to review then please do not hesitate to contact us.